A&P Adjusts Pathmark Pricing

ELLIOT ZWIEBACH

MONTVALE, N.J. — A&P here said it is continuing to make adjustments in pricing and merchandising at its Pathmark stores to strengthen their identity as a price-impact operator.

“There's a very precise strategy on managing the categories [at Pathmark], and you're going to see a lot more of that in the next couple of periods,” Eric Claus, president and chief executive officer, told industry analysts in a conference call discussing third-quarter results.

He said price investments are being made on “relevant items,” similar to the policy A&P implemented at its core stores a year ago, rather than simply dropping prices overall.

“We're doing it in a staggered way, with more yellow-tag specials in the Center Store and a different strategy with our fliers [that includes] dramatically increased private-label exposure,” he said. “We're also very market-targeted in our pricing strategy to ensure we have the right prices for the right competitor — and we always pick the lead price competitor in every market to price against.”

Asked if A&P is raising prices on less sensitive items at Pathmark, as it did at A&P-banner stores, Claus said, “Actually there hasn't been a lot of increase in prices. If anything, you can take very dead items that really aren't moving and reduce the prices there and get some decent volume with decent margin out of them.”

The quarter and 40-week span, which ended Nov. 29, yielded losses on continuing operations and stronger sales resulting from the late-2007 acquisition of Pathmark Stores.

The loss for the quarter was $3 million, compared with net income of $73.1 million a year ago, when results included a gain of $106.1 million from the sale of A&P's shares in Metro, the Quebec-based operator to whom A&P sold its Canadian holdings in 2005. Adjusted operating cash flow for the quarter was $78 million, compared with $20.5 million a year earlier.

Sales for the quarter rose 61.5% to $2.1 billion, with comparable sales up 1.9% at A&P stores and down 0.5% at Pathmark.

For the year to date, the loss on continuing operations was $2.8 million, compared with net income of $131.5 million, which included a gain of $184.5 million from the sale of the Metro shares. Adjusted operating cash flow for the period was $241.2 million, compared with $87.2 million.

Sales for the 40-week period rose 71.4% to $7.2 billion, with comps up 2.7% at A&P and 2% at Pathmark.

Karen Short, an analyst with Friedman, Ramsey, Billings & Co., New York, said she was encouraged by the results, “with increased confidence that management is executing in a tough environment; plans remain on track with the Pathmark integration; the company will reach the $150 million synergy target by year-end; A&P will be cash-flow positive by the end of the fourth quarter; and management remains focused on balancing the continued upgrade of the store base with some debt reduction throughout the coming fiscal year.”

She said she attributed the weak third-quarter comps at Pathmark to reduced pricing and the decision to cease offering free turkeys at Thanksgiving “[as part of an effort] to wean the customer off cherry-picking behavior.”

Claus said A&P sales in the first few weeks of the fourth quarter, which included the Christmas and New Year's holidays, were “flattish, though sales seem to be bouncing back somewhat in the last week or so. But the next three or four weeks will probably be a getter gauge than the last three or four.”

He said he attributed the weak post-Thanksgiving sales to shifts in the calendar, “which meant holidays fell on days that were not nearly as favorable to selling as in the prior year,” plus negative weather conditions and heavy discounting by general merchandise retailers that hurt the chain's GM holiday sales.

Christian Haub, executive chairman, said A&P achieved close to $85 million in synergies in the first 12 months since acquiring Pathmark, “and at the end of the third quarter our run rate was approximately $140 million, which virtually ensures we will achieve our original target of $150 million in synergies. From that perspective the acquisition was a big success.”

Brenda Galano, senior vice president and chief financial officer, said A&P plans to spend approximately $30 million on capital projects during the fourth quarter, compared with $26 million in the third, which included conversions of seven Super Fresh stores in Philadelphia to Pathmark Sav-A-Centers.

She said the company contemplates capital spending for 2009 in the range of $130 million.

* COMPS EXCLUDING PATHMARK. COMPS FOR A&P'S PATHMARK SEGMENT DECREASED 0.5% DURING THE THIRD QUARTER AND ROSE 2% FOR THE 40-WEEK PERIOD.