Struggles Intensify for A&P

JON SPRINGER

MONTVALE, N.J. — A&P's latest turnaround effort careened sharply off course when the retailer abruptly replaced its newly installed chief executive officer and reported further deterioration of sales and a heavier quarterly loss, sparking concerns among analysts and debt-rating agencies.

The first-quarter financial results, which one analyst said “shocked even the greatest of skeptics,” led to speculation about A&P's future liquidity. Rating agencies Standard & Poor's and Moody's Investors Service downgraded the retailer's corporate credit rating last week, citing liquidity concerns, while stock in the company fell to new historic lows.

Ron Marshall, the former Pathmark executive named as A&P's CEO in February after an extensive search, was out July 23 as A&P reported a 7.2% decline in same-store sales and a loss of $122.6 million for the fiscal first quarter that ended June 19. Appointed in Marshall's place was Sam Martin, most recently the chief operating officer at Office Max and before that a senior manager at Wild Oats Market, ShopKo Stores and Fred Meyer Inc.

SN was unable to contact Marshall for comment last week. Martin was unavailable.

Christian Haub, executive chairman of A&P, addressed the executive change by saying that the board preferred Martin's skills to Marshall's as it moved to the “implementation and execution phase of the turnaround.” Haub emphasized that the turnaround plan was developed by representatives of Tengelmann Group and Yucaipa Cos., the retailer's major stakeholders. Marshall had spent his first months as CEO outlining that plan for analysts.

Sources said they were stunned by the turn of events and surmised there was a rift between Marshall and the board of directors.

“Clearly there was a disconnect between Marshall and the board,” one observer, who asked not to be identified, told SN. “Exactly what the disconnect was and how many issues were included, is not known. But it seems likely that it was a disconnect with the Tengelmann side of the board as well as the Yucaipa side of the board.”

Karen Short, an analyst with BMO Capital Markets, said Marshall “was not equipped to handle the situation he was in. He was not a leader.”

While A&P acknowledged it had engaged the consulting firm Alix Partners “to work on some of the turnaround initiatives,” Short told SN that she wondered if “they didn't hire Alix Partners as a stopgap to cover what Ron wasn't doing.”

Martin was described by sources as a “team builder” and “back slapper” with skills in merchandising and operations, in contrast to Marshall, an “introverted intellectual” known for his financial skill. “We believe [Martin] has the skill set to implement the necessary turnaround initiatives at A&P,” Susan Anderson, an analyst at Citigroup, said in a research note.

That turnaround is taking on a new urgency as liquidity concerns have grown along with the losses.

Haub described a need for “a revenue-driven turnaround” with cost reductions and financing initiatives pursued along with previously expressed plans to improve price image and shopping experience at A&P's stores. Financial initiatives under consideration include pursuing the sale of “non-core assets” and sale-leaseback financings, Haub said.

“A&P is sitting on a lot of assets in the form of favorable leases,” one source, who asked not to be identified, told SN last week. “Those are good collateral for loans.”

A&P “has been trying to do sale-leasebacks for some time,” the source added.

Short estimated the company could realize as much as $160 million as a result of sale-leaseback deals.

Assets for sale may include the profitable Food Emporium chain base in Manhattan, which Short estimated could be worth $200 million. Others said they would expect A&P would look to sell stores in outlying geographies such as Washington, D.C., Maryland and Connecticut.

In stores, the A&P turnaround has yet to catch on, Haub acknowledged, although he said the “Lower Price Project” ongoing at legacy banners (A&P, Waldbaums, SuperFresh) had reached targeted competitive levels in Center Store. Sales in those stores, he said, had “stabilized,” while sales continued to deteriorate at Pathmark.

Declines in traffic continue to plague Pathmark, where an effort to improve store cleanliness, variety and in-stock positions referred to as Project MMX was launched during the first quarter.

Failing to get the lift on sales commensurate with price investments during the quarter contributed to EBITDA crashing 76.5% to $19 million in the first quarter vs. $81 million in the same period last year, while gross margin as a percentage of sales declined 50 basis points to 29.78%, the company said. Haub nevertheless pointed out that sales declines at legacy stores had ebbed since the end of the quarter, and that certain categories had begun seeing positive results from price investments.

“We obviously need to get traction on the top line and on margin, and on the operations side of the business,” Haub acknowledged. “We haven't gotten the response to some of the actions we had taken as quickly as we might have liked, but we do see underneath the pure numbers some real progress.”

Rating agencies were particularly skeptical, noting $155.3 million in convertible notes due next June. Standard & Poor's last week lowered its rating a half-notch to “CCC” with a negative outlook, reflecting “our projection that the company may be illiquid at some point in the near term as a result of weak performance and its considerable near-term maturities.”

Moody's last week downgraded its speculative-grade liquidity rating of A&P. “We believe that A&P's capital structure is ultimately unsustainable at current performance levels,” Marie Menendez, senior vice president of Moody's, said in a statement. “As a result, Moody's believes that there is a relatively high probability that the company could pursue a material change to its capital structure. This could include transactions which Moody's would view as a distressed exchange and hence a default.”