FLEMING LEAVES RETAIL TO FOCUS ON DISTRIBUTION

DAVID GHITELMAN

DALLAS -- Fleming here said last week it will sell its 110 price-impact stores, a process it expects to begin late this year and complete in early 2003.

The move followed several recent developments that have shaken the company, including the January filing of Chapter 11 bankruptcy by Kmart Corp., Troy, Mich., Fleming's largest customer; published reports earlier this month in SN and other periodicals asserting that the company was using unusually aggressive tactics to lower vendor costs; and a sharp decline in its stock price from a 52-week high of nearly $30 to a 30-year low of $4 share early last week.

The stock was $5.05 at the close of trading on Sept. 26.

In related actions, Fleming said:

It is lowering its earnings guidance to a loss per share of between 5 cents and 0 cents for the third quarter, and earnings per share of between 35 and 45 cents in the fourth quarter. The previous guidance, reiterated as late as last July, had been for EPS of 65 to 70 cents and 80 to 85 cents in the third and fourth quarters, respectively.

It confirmed that it has eliminated 350 headquarters jobs since July.

Mark Hansen, Fleming's chairman and chief executive officer, said in an exclusive interview with SN: "These eliminations were not unanticipated because we're doing a massive technology conversion. Also, an evolving business model requires structure."

It is reducing its estimates of capital expenditures for 2002 and 2003. Fleming said it now expects to spend $180 million on cap ex this year vs. the $200 million it estimated in February, and $135 million in 2003 vs. the approximately $175 million it estimated in July.

It will continue to own and operate 17 Yes!Less extreme-discount stores and still plans to roll out the format to franchisees beginning early next year.

During a conference call with analysts following the announcement of the store sales, Hansen explained that Fleming decided to divest after it acquired Core-Mark International -- a convenience-store distributor -- a transaction that was completed in July. "That gave us a nationwide, multi-tier distribution network," he said.

Fleming's increased role as a distributor to the c-store industry put the company in a position where "we did not want to compete with our own customers, particularly in fuel centers," he added.

Hansen said Fleming expects the sale of the price-impact stores to produce "proceeds net of taxes in excess of $450 million." This money will go to pay down Fleming's debt, he noted.

Morgan Stanley, New York, is advising the company on the sale of its 44 Rainbow Foods stores in the Minneapolis area, and Food Partners, Washington, is advising Fleming on the sale of 66 Food 4 Less stores and other Rainbow units, according to Hansen.

Hansen said Fleming had "received multiple offers on substantially all the stores." He added that the company expects to retain "up to $400 million" in the supply business of the divested units.

Analysts told SN they considered the decision to sell the price-impact stores a good move. Jonathan Ziegler, San Francisco-based managing director, Deutsche Banc Alex. Brown, New York, said, "The stock has been in a free fall. Getting rid of the stores alleviates the concerns of investors who thought there was a liquidity problem."

Ziegler also said Fleming's strategy was logical. "Distribution doesn't require a lot of capital. I agree with the idea of going after the growth areas."

Bryan Hunt, vice president, high-yield research, Wachovia Securities, Charlotte, N.C., told SN, "I think the sale of the stores is a positive. You have a business that created conflicts. In one case, Fleming had one of its own stores right across the street from a customer's store."