A&P LOOKING FOR BIGGER SPLASH WITH RENOVATIONS

Jon Springer

MONTVALE, N.J. -- A&P here will spend its newfound riches to invest in "full scale" fresh-store remodels, saying the $1.5 million renovations produce significantly better results than stores remodeled for less capital investment.

Christian Haub, the outgoing chief executive officer of A&P, said stores that have received large-scale remodeling investments of $1.5 million are generating sales increases "in the high teens," as opposed to those receiving fewer revisions and less expenses, which have experienced "mid-single-digit" increases. Both approaches are intended to lift sales at A&P by featuring perishable and prepared foods prominently. Haub made his remarks during a conference call with analysts discussing the retailer's first-quarter financial results.

"We are experiencing significant volume lift in the fresh department sales, and the entire store is encountering sales increases," Haub said of the 42 fresh-format renovations A&P had completed by the end of its fiscal first quarter June 18. "The experience we gained from these early conversions has now led us to modify our approach. Instead of both small- and large-scale projects, we now believe we will achieve our best possible returns from full-scale conversions, which will typically cost upwards of $1.5 million."

Flush with cash as the result of its pending sale of its Canadian stores to Metro, A&P can afford to pay for costlier renovations. Mitch Goldstein, A&P's chief financial officer, said the company expects capital spending of around $250 million for the year. "We may accelerate [spending] in the U.S. with emphasis on the fresh store conversions," he said.

Haub acknowledged that the busy renovation program for the balance of the year will be reflected in the company's financial results, noting that major renovations are apt to disrupt business at the stores and incur start-up costs related to promoting the changes. He also said the decision to focus on large-scale projects would push the majority of renovations to the second half of the fiscal year.

"You're taking an existing store that's operating and you're making some pretty significant physical changes to it, so you disrupt your business to some degree," Haub said. "Then you have to put more effort and resources into the store -- some of that can get capitalized if it's new equipment you're installing, but a lot of activities that go along with it are expenses that are really just part of the renovation and conversion. And then you have the start-up investment of really getting these stores going and driving customers into the stores."

But by making a bigger splash, Haub insisted the revamped stores will win shopping trips over the long term. "We are seeing that we are not only selling more to our existing customers, but driving more traffic into the stores," he said. "The bigger impact we can make for a store conversion, the longer the impact lasts and the greater uplift we are getting in overall sales. That has been a really key learning for us."

Haub, who said he will step aside as chief executive officer and become the chain's executive chairman, said his successor as CEO, Eric Claus, "executed the two-tier format strategy very, very successfully" in his prior role as president of A&P Canada. "You're going to find as you get to know Eric that he's going to be a great addition to the U.S. business," Haub said of Claus. He also acknowledged the contributions of Brian Piwek, A&P's chief operating officer, who retired last week after three years heading A&P's U.S. strategy. Prior to that, Piwek was a key architect of the company's successful Canadian operations, Haub said.

A&P reported a loss of $89 million, or $2.27 a share, on sales of $3.4 billion during its fiscal first quarter. The loss includes one-time charges of $68 million related to the switch of facilities to C&S Wholesale Grocers ($50 million), the exit of its Midwest operations ($15 million) and $3 million due to a hedge charge.

1ST-QUARTER RESULTS

Qtr Ended: 6/18/05; 6/19/04

Sales: $3.4 billion; $3.3 billion

Change: 3.1%

Comp-store: -0.36%

Net Loss: ($89.2 million); ($42.8 million)

Loss/Share: ($2.28); ($1.11)