Cost Inflation Painful for A&P

JON SPRINGER

NEW YORK — Worsening product cost inflation — with many food products exceeding 5% cost increases — is making for a “painful” environment for A&P and its shoppers, Christian Haub, executive chairman of the Montvale, N.J.-based retailer, said at the Goldman Sachs Global Retailing Conference here last week.

Haub's remarks, which took on a decidedly more cautious tone than those at a quarterly earnings call five weeks earlier, accompanied another rigorous sell-off of A&P stock and prompted analysts to again ponder whether the retailer would be better off as a private company while it rides out the economic downturn and completes the integration of Pathmark.

A&P stock plummeted by more than 20% in late July, when officials were upbeat over a first-quarter report showing sales had improved although profits and EBITDA were slightly behind expectations. Haub last week said A&P “learned a lesson” from the experience.

“There is no upside to being as optimistic and favorable as we have been,” Haub said. “I want to emphasize that I believe in this company as much as I had before, but you have to be realistic: The environment is difficult. It is challenging. I don't think there is any use to believe there is upside when everyone around you is giving earnings warnings. We will not withstand all of those pressures unscathed. And there have been events in recent months that were worse than we would have anticipated.”

Haub also said the company, which traditionally has not provided earnings guidance, is “considering whether we shouldn't at least put some medium-range targets out there,” in an attempt to better manage market expectations and the resulting wild swings in valuation.

Accelerated price inflation is causing consumers to cut back spending and is sabotaging A&P's efforts to improve its price perception, Haub said.

“We have said inflation up to 5% we could manage without too much pain, but up to 6% and 7% — it's painful,” he said. “We have to acknowledge there is more downside potential in the short term.”

Haub said competitors are managing the rising prices with more aggressive promotions, and that passing along the increases has begun to meet consumer resistance.

“With the kind of increases that have come through, certain critical price thresholds are being breached, and consumers out there are starting to experience sticker shock,” Haub said. “They are in the stores every week, and so they see the price increases more than in any other form of retail.”

These trends favor A&P's decision to direct its attention toward reformatting stores to its Pathmark price impact and Food Basics discount models, rather than the more upscale fresh format under the A&P, Waldbaum's and SuperFresh banners, Haub said. Those stores, which Haub said have made some strides in improving price perception over the last year, are making less progress on that front now.

Haub, who in addition to his duties as A&P's executive chairman heads the retailer's largest investor, Tengelmann Group, said the depressed stock price — down by more than 50% during the last year — has created share-buyback opportunities.

Karen Short, an analyst at Friedman, Billings, Ramsey & Co., New York, in a research note last week urged Tengelmann to ramp up the buyback and take the company private, assuming Tengelmann has the funds to do so.

“Going private would allow management to execute on the integration of Pathmark without the annoyance of the public markets, and once the integration is complete and EBITDA margins have been raised to industry levels, we believe A&P could be IPO'ed at much higher valuations,” Short said.