Tops Sees Margin Pressure, Eyes New-Store Growth

MARK HAMSTRA

WILLIAMSVILLE, N.Y. — Food-cost inflation is pressuring margins at Tops Friendly Markets here, company officials said in a conference call discussing fourth-quarter results, but analysts said they expected the company to generate improved financial results this year.

“Food inflation remains management's No. 1 concern,” said Bryan Hunt, a Charlotte-based analyst with Wells Fargo Securities, in a report.

Asked on the call about competitive pressure from a new low-price promotion at rival Wegmans Food Markets, Frank Curci, Tops' president and chief executive officer, said Tops competes effectively with its more promotional strategy.

“Our margins have been squeezed, and Wegmans doesn't help, but we are sticking to what we do well,” he said.

Rochester, N.Y.-based Wegmans earlier this year unveiled a “price freeze” on 40 products that it said it would not increase prices on for the rest of 2011.

Tops noted, however, that it believes Wegmans plans no new stores in its area this year, and that its other major competitor in the region, Wal-Mart, has only two openings planned, after opening six stores in the last two quarters.

Tops, on the other hand, has opened one new store already this year and plans one or two more.

“We're a growing company,” Curci said, noting that Tops is also looking for potential acquisitions.

Hunt of Wells Fargo projected that Tops will be in a “strong free cash flow position in 2011” and could use the excess cash for “tuck-in” acquisitions.

He projected same-store sales growth — which will reflect the Penn Traffic stores acquired in January of last year — could be 4% to 5% in the current year.

Tops said it was seeing sales growth in the mid-teens after the acquired stores have been converted to Tops.

“The acquisition went as well as it possibly could have,” Curci said. “We are happy with how well all the new stores were integrated.”

The acquisition of most of Penn Traffic's stores spurred a 25.1% increase in sales for the fourth quarter, Tops said. The loss for the 12-week quarter, which ended Jan. 1, totaled $13.8 million, vs. a loss of $24.3 million in the year-ago period, which contained one extra week.

Gross profit for the quarter increased 23.5%, to $142.4 million, from $115.3 million in the prior-year period, primarily reflecting the addition of the Penn Traffic stores, Tops said. Excluding the impact of inventory valuation adjustments, gross profit was flat at 27.1% year-over-year.

Sales in the most recent quarter were $530.8 million, and same-store sales, excluding the extra week, were down 0.7%. The same-store sales decline reflected a 1% impact from acquired stores on the legacy locations, the company said.

For the 52-week fiscal year, Tops posted a loss of about $27 million, vs. a loss of $26 million in the year-ago quarter. Sales for the year, which contained 52 weeks vs. 53 weeks in the preceding period, were up 33.1%, to $2.26 billion. The 55 acquired stores that remain in operation — including seven that have not been converted to Tops as they await an antitrust ruling — contributed $553 million. Same-store sales for the year were up 0.1%, excluding the extra week.