A&P Plans to Exit Michigan; New Orleans Looms

JON SPRINGER

MONTVALE, N.J. — A&P last week confirmed it was in negotiations to sell its ailing Farmer Jack division and that in the coming weeks it will close its warehouse as well as all stores for which it is unable to find a buyer.

“Despite our very best efforts to revitalize Farmer Jack, we haven't been successful,” Eric Claus, A&P chief executive officer, said of the 66-store Farmer Jack division, which has hemorrhaged sales and market share in a tough metro Detroit economy in recent years. “Candidly, these stores are better off with those who specialize in that market and can make a go of it.”

A departure from Michigan had been the subject of industry speculation for some time, with talk increasing several weeks ago when terms of a deal with organized labor there expired. Speaking in an earnings conference call last week, A&P officials said the move would allow the company to focus on its core markets in the Northeast where attention is on the impending merger with Pathmark.

Officials were ambiguous regarding A&P's other “orphan” division, in New Orleans. While clearly not a part of A&P's long-term plan, the Sav-A-Center chain in New Orleans is an asset the company could sell on its own terms to a single buyer, officials indicated in the call. “We are under no stress or pressure to act there,” said Claus.

The same was not true in Michigan, where financial results broken down by region revealed comparable-store sales decreasing by 6.8% in the fiscal fourth quarter and by 5.6% for the fiscal year ended Feb. 24. EBITDA in Michigan decreased to virtually $0 for the year.

A&P indicated that talks were ongoing with multiple buyers for specific locations and, according to Claus, “the lion's share” of stores are expected to be sold. As reported previously in SN, Kroger, Nash Finch and independent retailers have been said to be looking at specific locations.

Breaking down sales and earnings by division also served to paint a brighter picture for A&P's core Northeast operations, which comprise 80% of the company. Comparable-store sales in that region increased by 0.9% for the quarter and 0.6% for the fiscal year, with results from revamped fresh and discount stores driving the gains. The Northeast region also paced bottom-line results with EBITDA of $30 million increasing by 26% on the year and gross margins up 47 basis points to 31.02% for the year.

New Orleans comps, still up against extraordinary gains in the wake of Hurricane Katrina, fell by 18.3% and by 0.9% in the fiscal year. EBITDA there of $19 million increased by 4.7% for the year.

Overall, A&P reported $1.6 billion in quarterly sales in the quarter and $6.85 billion in sales for the fiscal year. EBITDA totaled $39 million for the quarter and $151 million for the year. The quarterly loss of $7 million was down from a $39 million loss in the fourth quarter a year ago.

Net income for the year was $27 million, compared with a gain of $393 million in fiscal 2005, which included the sale of A&P Canada.

Analysts appeared encouraged by the results in the core market and the potential for momentum given Pathmark's favorable earnings report earlier this month.

“At this stage it appears likely A&P will divest of both Michigan and New Orleans, so we are only concerned with the trajectory of the Northeast business — and results indicate that the business is gaining momentum,” Karen Short, an analyst for Friedman Billings Ramsey, New York, said in a research note.

John Heinbockel, an analyst for Goldman Sachs, New York, was less sanguine over A&P's prospects, saying in a research note that although results in the Northeast were encouraging, earnings growth would become increasingly difficult as the company cycles cost reductions, the benefits of its C&S deal and approaches the end of a technology outsourcing agreement with Metro Inc., which purchased A&P's Canada operations.

Preparations for the merger with Pathmark are the top item of business for A&P, officials said. An integration team led by Brenda Galgano, A&P's chief financial officer, is focused on realizing synergies from the deal “from day one,” Galgano said. While regulations prevent A&P from discussing operating strategies such as product cost and pricing, a team is currently working on plans for areas like technology and logistics, including a plan to integrate the chain's separate deals with supplier C&S Wholesale Grocers.

While both A&P and Pathmark buy from C&S, A&P is said to have more favorable terms than Pathmark, which struck a deal with C&S while it was reeling from an abortive takeover.

“We've already had talks with C&S and I think it's in everybody's best interest that the contracts come together as one when this transaction comes together,” Claus said. “This can only be a win-win for all parties.”

A&P was preparing a reply to the Federal Trade Commission's second request for materials related to the deal, Galgano said. The company still expects the merger to be complete in the second half of the year. Pathmark and A&P will release a joint proxy statement next month.

Claus said A&P has set up a management incentive plan based on achieving projected cost savings as a result of the merger.

Attention to the merger, Galgano said, will result in a lower capital spend during the current fiscal year, projected to be $150 million vs. $208 million during fiscal 2006. A&P in fiscal 2006 completed 27 store remodels and opened four new stores. This year, A&P plans to complete about 20 store remodels.

Improved results at stores that have received major fresh makeovers paced sales gains on the year. Claus said earlier fresh remodels are still experiencing sales gains in their second year.