MEGAFOODS SHUTS 9 UNITS, POSTS LOSS

ELLIOT ZWIEBACH

MESA, Ariz. -- Megafoods Stores here has closed nine of its 71 stores and hired a new chief financial officer on an interim basis as its works its way through Chapter 11 bankruptcy protection.

The company last week also reported a loss of $15.96 million for the second quarter ended July 2, compared with net income of $967,000 a year ago. Megafoods said the loss was "significantly higher than expected." Megafoods, as reported, filed for Chapter 11 protection Aug. 17.

The store closings consisted of all eight units in California and one in Nevada.

Daphne Dicino, a communications consultant representing Megafoods, said the retailer closed its three California units outside San Diego County Aug. 27. Megafoods' five California stores in San Diego County continued operating for an additional week with limited stock before closing Sept. 2.

Brooks O'Neil, a securities analyst with Piper Jaffray, Minneapolis, said results at the California stores "apparently turned sour earlier this year, and the company has been losing money there for the last several months."

Now that Food 4 Less Supermarkets, La Habra, Calif., is targeting San Diego as a major expansion market for its warehouse store format, O'Neil told SN, he is doubtful that Megafoods will have an easy time selling those stores.

The company also closed a store in Henderson, Nev., that opened last December. Dicino said that store has had ongoing

problems that have proven difficult to correct, including a sewage leak.

All other stores are operating with full stock, Dicino said. She said she was unaware of plans to close any additional units.

"The company is going through a major assessment of its operations right now as it seeks to create a business plan that will allow it to continue to operate," Dicino said.

"We're studying operations and designing a plan that focuses on cost-effective moves to demonstrate to the creditors that Megafoods can operate profitably and emerge from Chapter 11 as a stronger, healthier company.

"That plan will take several weeks to formulate," she added.

In other developments, Jack J. Walker resigned as chief financial officer and executive vice president of Megafoods Sept. 2.

His interim successor is Michael Korotkin, a partner in Price Waterhouse, Los Angeles, specializing in business turnarounds.

In a statement explaining his resignation, Walker said, "With Megafoods in Chapter 11, I believe the company will need different financial skills. Michael Korotkin will provide the company with the necessary guidance during its reorganization. "I look forward to continuing to assist him and the company's officers, particularly in the area of real estate," Walker said. He will remain a Megafoods director.

According to the company, Korotkin will advise Dean G. Miller, Megafoods chairman, president and chief executive officer, on issues relating to finances and management information systems.

"He will also assist the company with the development of a plan to restore profitability," the company said in a statement.

The company said it has initiated a search for a permanent successor to Walker as CFO.

Although Megafoods issued its second-quarter earnings earlier this month, that represented a delay of two weeks, an indication, according to one analyst who asked not to be named, that the company does not have adequate reporting systems in place.

"It's abundantly clear from the delay that the company had great difficulty figuring out how much money it had lost because of the lack of systems," the analyst said. "That's why Megafoods brought in Korotkin."

As for the future of Miller at Megafoods, Dicino maintained that Miller has a good working relationship with the creditors' committee, although some securities analysts questioned whether he would opt to remain with the company.

2ND-QUARTER RESULTS

Qtr Ended 7/2/94 7/3/93

Sales $179.2 million $92.8 million

Change 93%

Same-store -4.0%

Net Income ($15.96 million) $967,000

Inc/Share ($1.87) 11 cents

26 Weeks 1994 1993

Sales $329.2 million $184.2 million

Change 79%

Net Income ($18.8 million) $2.1 million

Inc/Share ($2.19) 25 cents