FLEMING REPORTS EARNINGS FROM OPERATIONS DECLINE

ELLIOT ZWIEBACH

OKLAHOMA CITY -- Fleming Cos. here said last week it was encouraged by ongoing earnings improvements but disappointed by operating results in its two business segments for the second quarter and 28 weeks ended July 11.

Edward C. Joullian 3rd, interim chairman, said the company has been successful in picking up new wholesale business and is working to improve performance in its retail chains. Joullian took the helm late last month following the departure of Robert Stauth, chairman and chief executive officer, as reported in SN last week.

Securities analysts told SN they are pessimistic about Fleming's short-term prospects. Net income rose 6.4% to $13.6 million for the 12-week quarter and 59.9% to $28.9 million for the half, while sales fell 1.3% to $3.5 billion for the quarter -- the smallest rate of decline in three years, the company noted -- and 2.8% to $8.1 billion for the half. Operating earnings for Fleming's food-distribution segment fell 5% to $62 million for the quarter and 2% to $154 million for the half, while food-distribution sales fell 3% to $2.7 billion for the quarter and 4% to $6.2 billion for the half. The company said operating earnings in food distribution were negatively affected by lower sales.

In the retail food segment operating earnings fell 5% to $21 million for the quarter and 18% to $40 million for the half, while retail food sales rose 4% to $818 million for the quarter and 2% to $1.9 billion for the half. The company said operating earnings in the retail segment were negatively affected by a 3.9% decline in same-store sales, while sales were affected by competitive store openings and pricing competition in selected markets. Andrew Wolf, an analyst with Merrill Lynch, New York, said

Fleming's internal sales numbers -- sales minus new and lost accounts -- fell to minus 4% during the quarter, "and if a major chain reported comp sales of minus 4%, everyone would be very concerned," he said.

According to Wolf's calculations, Fleming's internal sales fell 5.2% in the first quarter, 5.8% in 1997 and 7.6% in 1996, and although there's been a steady improvement, "the fact that sales are no longer falling off a cliff is just not good enough," he said.

On the plus side, Wolf said the hiring of Bain & Co., Boston, "to help Fleming see where to take the company strategically" is a good sign, "and so is the fact they're looking for a new CEO from outside the company. Fleming has been very insular, and it can really use some outside influence.

"Hopefully, Bain will not pull its punches and will tell Fleming what it has to do. And finding a tough-minded person as CEO could strategically be very beneficial for Fleming." Bob Lupo, a high-yield analyst with BA Securities, Chicago, said the second-quarter results were disappointing, "and they reflect management's inability to strengthen its operations, especially the weak comp sales in the retail segment.

"And it's clear the wholesale business segment is also weak because customers are not spending money on cap-ex, and I'm concerned about how far they have to go to get both segments turned around," Lupo said.

The company has a strong balance sheet, he noted, "so it does have time, but given the pace of industry consolidation and the ongoing disappearance of many independent operators, Fleming stands to be pretty vulnerable to continued losses on both sides of its business."

Once a new chief executive officer is in place, Lupo said, he's likely to take a series of one-time charges "to clean out the deadwood and weak businesses, and that will mean poor earnings initially. And while that can be a good thing, Fleming has made those kinds of changes before and it didn't change anything."

According to Joullian, "While we were encouraged by our continuing improvement in overall earnings, we are not pleased with operating earnings in our two business segments.

"We are intensifying our efforts to grow sales profitably and are making progress in our food-distribution segment."

He said Fleming achieved "major business gains" during the quarter from Clemens Markets, Kulpsville, Pa., a 12-store operator that switched from using Fleming as a secondary supplier to using it as its primary supplier, enabling Fleming to boost sales to the retailer by 40% on an annualized basis.

"New business in the first quarter with Acme Markets [operated by Fred W. Albrecht Grocery Co., Akron, Ohio], Fedco in southern California and others is beginning to impact sales positively," Joullian added.

"Although retail food segment sales increased, we were disappointed that same-store sales declined 3.9%. We have increased our capital investment by more than 60% [from $130 million last year to $200 million to $230 million this year] and are aggressively pursuing programs to improve sales and earnings in our retail chains."

The company said not only Fleming-owned stores but also the distributor's independent retail customers have increased their capital spending for new stores and remodels, with the majority of those investment projects expected to be completed in the third and fourth quarters.

With the retirement two weeks ago of Stauth, Joullian said, the company is "continuing the strategic review and planning process we began earlier this year. We remain focused on pursuing our targeted sales strategy to attract new customers and to increase business with current customers by helping them to better service consumers. "Our management team and our board are committed to improving Fleming's operational performance and shareholder equity."

Fleming also elected a new board member last week. He is Herbert M. Baum, chairman and chief executive officer of Quaker State Corp., Irving, Texas. According to Joullian, what Baum brings to the board is "considerable experience in retailing, brand-building and distribution." 2ND-QUARTER RESULTS Qtr Ended7/11/987/12/97 Sales$3.5 billion$3.6 billion Change- 1.3% Net Income$13.6 million$12.8 million Change 6.4% Inc/Share36 cents34 cents 28 Weeks19981997 Sales$8.1 billion$8.3 billion Change- 2.8% Net Income$28.9 million$18.1 million Change 59.9% Inc/Share76 cents48 cents