GRAND UNION IS REVAMPING ITS STRUCTURE, CUTTING STAFF

DAVID ORGEL

WAYNE, N.J. -- Grand Union Co. here last week unveiled a corporate restructuring program that will reduce staff, streamline divisions and revamp merchandising units.

The move came as the company reported "disappointing" sales results for the period ended March 29 and lower earnings before interest, taxes, depreciation and amortization; last-in, first-out provision; unusual items; and extraordinary gain. EBITDA fell by $19.2 million for the year and $9.1 million for the fourth quarter. Grand Union also said first-quarter EBITDA will fall "significantly below" levels of a year ago.

Financial analysts interviewed said Grand Union is pinning hopes on cost reductions, lower prices and store remodels to help turn its financial results around.

Grand Union's reorganization includes a staff reduction of about 80 nonstore associates, primarily at the firm's corporate headquarters here, said Roger Stangeland, chairman and interim chief executive officer. The restructuring is expected to result in annual administrative cost savings exceeding $5 million. The company said it will also seek further ways to reduce costs and advance efficiencies.

Major parts of the reorganization include the following:

Simplification of the company's field operations to create two operating divisions instead of four.

Restructuring of the retailer's financial departments.

Consolidation of the Personnel Benefits department into the Human Resources and Labor Relations department.

Outsourcing of the Quality Control department.

Restructuring of the company's merchandising departments.

"This latest reorganization has further flattened and delayered our structure," Stangeland said. "Our new and simpler organizational structure has eliminated redundancies and unnecessary work, while providing faster, more direct communication to and from our stores. In a very short time, we have removed three layers of structure between the chief executive officer and the store manager so that only two layers remain."

Grand Union said it recorded a $9.8 million pretax charge in the fourth quarter of fiscal 1997, which includes $7.8 million for reorganization activities.

The company reported sales last year grew 0.2% to $2.313 billion from $2.308 billion in the prior year. Sales for the fourth quarter fell 0.9% to $515.3 million from $519.9 million. Same-store sales increased by 0.5% for the fiscal year and decreased by 0.4% for the fourth quarter. Results for fiscal 1997 were favorably affected by the inclusion of two Easter periods compared with one in the prior year.

EBITDA was $125.2 million (5.4% of sales) for the year and $26.8 million (5.2% of sales) for the fourth quarter. That compares with $144.3 million (6.3% of sales) and $35.9 million (6.9% of sales) for the comparable periods last year.

In the fourth quarter, in addition to the $9.8 million charge, the company recorded income tax adjustments totaling $38 million.

Commenting on financial results, Stangeland said, "While our sales results are consistent with the experience of other Northeast food retailers, they are disappointing.

The company believes the sales shortfall was attributable in part to milder winter weather this year and the overall economic climate in the company's operating areas, as well as intensified competition and short-term disruptions associated with store renovation programs."

The company continues to conduct a search for a president and chief executive officer to succeed Joseph J. McCaig, who resigned May 7.

Stangeland said "several excellent candidates" were already interviewed and the company expects to make a final decision soon. Stangeland said the company's capital development plans for this and future years are being reviewed but will be lower in scope because of significant management changes and current sales levels.

The company is currently in discussion with its investors regarding a possible acceleration of the purchase of the remaining $40 million of Class A preferred stock. Grand Union said it is confident that an agreement on acceleration can be reached promptly.

In saying that first-quarter EBITDA will be significantly below year-ago levels, Grand Union noted that the current first quarter doesn't include an Easter period, continues to be affected by heavy competition and continues a pattern of heavy promotional spending.

The company's bank lenders waived the EBITDA and interest expense covenants of its term loan and revolving credit agreements for the fourth quarter. They amended the agreements with respect to minimum levels of EBITDA, lowered the required amount of capital expenditures and changed interest coverage requirements for the 1998 fiscal year. Grand Union said it is currently in compliance with these amended debt agreements.

Kenneth Goldberg, an analyst with Merrill Lynch, New York, said Grand Union's restructuring, like those of other high-yield supermarkets, will mean many employees may have to handle the equivalent of two jobs. He said that while the fourth-quarter results were "modestly worse than expectations," indications for the first quarter are for "substantially below last year's level due to tightened competitive activity, which is a cause for concern."

Goldberg said that at the end of the first quarter the company will probably be below the level needed to be on track with bank EBITDA requirements for the year. However, he added that as the company's newly remodeled stores mature, "they should contribute to incremental cash flow to get the company back to required EBITDA levels." Goldberg added that Grand Union needs to spend more money on capital expenditures given the competitive environment.

Howard Goldberg, an analyst with Smith Barney, New York, said the big disappointment was in the lower EBITDA figures despite the company having outsourced distribution. He added that while the first quarter will be very challenging, the company is hoping that things will improve with a new CEO arriving soon and possibly realizing the benefits from overhead reductions and lower prices.

Bob Lupo, an analyst with BA Securities, Chicago, said the first-quarter weakness "puts Grand Union at a critical juncture." However, he noted that the retailer has been given time by its banks and there is "no imminent restructuring or default at hand." But, he added, "the market will view them gingerly going forward."

4TH-QUARTER RESULTS

Qtr Ended 3/29/97 3/30/96

Sales $515.3 million $519.9 million

Change- 0.9%

Same-store -0.4%

Net Income ($78.2 million) ($29.3 million)

52 Weeks 1997 1996

Sales $2.313 billion $2.308 billion

Change 0.2%

Same-store 0.5%

Net Income ($185.4 million) $715.6 million

Figures represent net loss applicable to common stock.