A&P Seeks Funds to Buy Time

JON SPRINGER

MONTVALE, N.J. — As losses mount, sales slide and debt maturities approach, A&P's new leadership team is racing to secure additional funding.

The struggling retailer last week was waiting for its banks to finalize a new term loan to provide some additional liquidity as heavy losses and declining EBITDA in the fiscal second quarter were draining its reserves. Sam Martin, who was named chief executive officer in July, maintained, however, that the company was making progress under a new leadership team focused on raising funds, slashing costs and transforming A&P to a customer-focused retailer.

“The fact is we're bringing comprehensive change to this company through all facets of the organization. These are significant and substantive changes and realistically they will take some time to produce the improved financial results we are all looking for,” Martin said. “But there should be no doubt that this management team is moving with urgency.”

Martin said A&P is at work on five “building blocks” of the turnaround, including an effort to add a new term loan and raise funds through asset sales. Analysts estimate a new loan could provide A&P about $100 million — or enough to provide some relief for the coming quarter or two. More will be needed when a round of $158 million in debt comes due in June.

“I think management is going to do all they can to keep it going, but even with this loan they will need to do something else when the debt comes due,” Susan Anderson, an analyst following A&P for Citibank, told SN. “The loan buys them time. But the problem is their EBITDA is deteriorating so fast. It used to be if they got additional financing they would be fine. Now because they are burning so much cash, if things continue at the rate they have been, it won't be enough for the long term.”

Jake Brace, A&P's new chief administrative officer, said the company was negotiating with its lenders on a “complex” real estate-backed term loan to be added to its existing asset-backed facility, which he said could be finalized soon. “When we do close and fund the transaction, this will create a significant amount of liquidity and provide us the time necessary to make the needed changes in our business,” he said.

Brace reiterated its previous intentions to raise funds through the sale of “non-core” assets, believed to include its Food Emporium gourmet chain in Manhattan. One source told SN that the company could make an announcement on such a deal at any time.

Anticipation of these money-raising events — along with a feeling of confidence in the new management team making its public debut — helped raise A&P's stock in the wake of the earnings call, analysts said.

Martin was appointed CEO after predecessor Ron Marshall was abruptly dismissed after only six months at the helm. Martin since replaced nearly the entire executive team, including appointing Brace, who helped lead a successful turnaround at United Airlines, as chief administrative officer.

“Martin has put in a strong management team with experience in successful turnarounds, effective marketing and operational restructuring, which have already started working together on the team's initiatives,” Karen Short, an analyst at BMO Capital Markets, said in a research note.

“They sounded very confident on the call, more confident than they had in the past,” added Anderson. “They had better answers for questions and in general, just came off with some confidence.”

Reducing costs, improving value and enhancing the customer experience in stores are the other “building blocks” of the turnaround, Martin said.

Brace said A&P had significant opportunities to reduce expenses, including $10 million already achieved through a corporate headcount reduction, $40 million through reduced expenditures on information technology and marketing, and the previously announced closure of 25 stores. Labor will also be a significant part of the cost savings, although Brace declined to disclose details.

Martin said pricing investments at A&P and Pathmark stores implemented earlier this year have begun to improve the broad perception of value at its stores but more work needs to be done to make pricing relevant to customers. Key to his strategy will be personalized offers based on loyalty card data and customer segmenting as A&P shifts to become a more customer-focused retailer.

“The culture of our company has been one of really working from the vendor side, not from the customer side — our focus has been inward, not outward,” he said. “So as we go forward, we're really going to be much more in tune with what the customers in this marketplace need and value, and respond to that in a way that makes us her first choice.”

Sales in the 12-week quarter decreased 7.1% as A&P posted a quarterly loss of $153.7 million. Comparable-store sales fell by 6.6%.