CARTERET, N.J. -- Today, tomatoes. Tomorrow, the world.
Shoppers at Pathmark's store in Long Island City, N.Y., last week noticed changes evident just beyond the entrance door. A welcome once marked by high-stacked floor displays of various items from the weekly sales flier -- what Pathmark referred to as "The Hot Spot" -- has cooled considerably. Instead, a basket of tomatoes and low-profile displays of Italian bread, cakes and cookies lined the wall; the floor was clear to provide vistas of an expanded produce section.
Elsewhere, SN observed shoppers discovering new displays of prepared foods, deli platters, salads and pizzas to go; expanded selections of cards, party supplies, books, toys and kitchenware; a dollar aisle; and significantly less overall clutter. Though the changes at the Long Island City store, built in 1977, were part of a major renovation, similar shifts in selection and layout have recently been completed or are under way at all of Pathmark's 142 stores.
The new merchandise selections and store design approach -- achieved at most Pathmark stores for a relatively modest investment of around $77,000 per store -- are the first signs shoppers may notice that their store is under new ownership: Yucaipa Cos., the Los Angeles-based fund managed by Ron Burkle, bought a majority stake in Pathmark this summer.
But behind the scenes, analysts emphasize, there are many more changes to come.
"Yucaipa's capability is becoming increasingly visible at Pathmark; we see operating momentum stabilizing soon and full-fledged turnaround taking root within the next year," John Heinbockel, an analyst at Goldman Sachs, wrote in a recent research note. Pathmark's earnings before interest, taxes, depreciation and amortization (EBITDA) have decreased from $192 million in 2000 to an estimated $138 million this fiscal year, or from 5% of sales to around 3.4%, Heinbockel noted, but he anticipates that in Pathmark, Yucaipa has "one of the greatest turnaround opportunities in the history of food retailing."
Merchandising improvements such as those under way now will account for only a small percentage of around $75 million in EBITDA Pathmark is capable of regaining by fiscal 2008, according to Heinbockel, estimating the changes could spark comparable-store sales gains of 2%. Other boosts could come as the result of aggressive capital plans for major renovations and new store builds, reductions in expenses, and by leveraging improved sales toward reducing supply costs.
According to Heinbockel, Pathmark's 15-year distribution agreement with C&S, struck in 1998, has provided fewer cost reductions than Pathmark might have expected, and the chain suffered some supply disruptions when C&S began supplying A&P earlier this year. However, Heinbockel said Pathmark has had "more successful dialogue with C&S in the past three months than in the previous three years," presumably to discuss cost reductions that could ultimately benefit both parties. C&S declined to comment.
Speaking to analysts at Pathmark's second-quarter earnings call in September, John Standley, the new chief executive officer imported from Rite Aid shortly after Yucaipa's investment, said the merchandise re-sets are designed to create space to expand perishable departments, add nonfood items, make stores easier to shop and provide space for value displays consistently executed in all stores. He said his first priority -- and a critical one toward improving earnings -- was to grow same-store sales.
"We have a lot of opportunity just within our existing stores to look at variety and itemization," Standley said. "I don't think we're going to invent a whole new mousetrap and try to build them all over the place."
Observers noted that significant obstacles to this plan remain. Pathmark needs to improve an image one analyst described as "Plain Jane," negotiate the effects of potential Wal-Mart expansion in its markets, and succeed despite not having a dominant market share in any of its operating areas.
Matt Casey, founder of Clark, N.J.-based Matthew P. Casey & Associates, said he is skeptical that modest renovations will make a real difference given the competitive New York and New Jersey markets. Casey described Ahold's Stop & Shop banner as having the best momentum there, while ShopRite remains dogged on price promotions. "This [remerchandising program] is something they should have done years ago," Casey told SN. "This could be a case of 'too little, too late."'
But analysts anticipate that competition will ultimately result in combinations of the various players in Northeast markets -- a strategy previously tackled by Yucaipa on the West Coast and a desire that Burkle has made no secret of with regards to Pathmark.
Jonathan Ziegler, an analyst with JM Dutton & Associates, El Dorado Hills, Calif., told SN he expects to see Pathmark devote resources toward building better presence and profits in the Northeast and eventually, engineer consolidation. "Although the Albertsons situation could rearrange those priorities some," Ziegler said, noting the possibility Yucaipa plays a role in the breakup of Albertsons.
Heinbockel speculated that Pathmark in coming years could look to pair up with one or more local competitors -- Montvale, N.J.-based A&P or Stop & Shop -- on the way toward consolidating retailers from Maine to Virginia and as far West as Cleveland, before exiting in a mega-merger with Kroger or Tesco.
