PATHMARK CITES ECONOMY, PROMOTIONS IN 2Q LOSS

JON SPRINGER

CARTERET, N.J. -- Pathmark Stores here has reversed its sales decline, but at a price.

Aggressive competition and a continuing inability to pass along commodity price increases led to a loss of $1.6 million, or 5 cents a share, for Pathmark's fiscal second quarter ended July 31, Eileen Scott, chief executive officer, said last week. Sales increased 1.6% to $1 billion and comp-store sales increased by 1.3% as Pathmark invested heavily in promotions to boost sales and protect market share amid fierce competition fighting for a consumer base that Scott termed "cautious and concerned" about the economy.

In light of the results, Pathmark reduced its yearly earnings estimates for the second time this year. The company now estimates earnings to range between 0 and 20 cents per share and earnings before interest, taxes, depreciation and amortization (EBITDA) to range between $154 million and $165 million. Previously, Pathmark expected earnings between 28 and 47 cents and EBITDA of $170 million to $180 million. Those estimates were adjusted down from initial guidance of 53 to 60 cents and EBITDA of $183 million to $187 million in May when Pathmark first revealed that commodity inflation was costing it market share and that it had begun aggressive promotions in destination categories to arrest first-quarter sales declines.

Pathmark's stock closed down more than 18%, to a 52-week low of $5.85, on the news last Thursday.

A 14% increase in medical costs as compared to the previous year exceeded Pathmark's estimate of a 9% rise and contributed to the quarterly loss, Scott said. She also cited an especially difficult economy in the Northeast and Mid-Atlantic states, saying consumer confidence underperforms the national average. Shoppers, she said, were reducing their number of trips and increasingly "bargain hunting" beginning in late June and continuing through July and August.

"It seems like there's two choices for a company like Pathmark in an economy like this -- they can either go for sales and take the short-term earnings pain or let sales drift lower and lose market share," Jonathan Ziegler, principal in PUPS Investment Management, Santa Barbara, Calif., told SN. "Pathmark seems to be making the right moves, it just appears they're operating in an especially tough market."

Analyst Gary Giblen, director of research for CL King & Associates, New York, told SN he felt Pathmark's quarter was "a harbinger for the entire food retailing industry," noting that Pathmark operates free of competition from supercenters and in some urban markets where it is insulated even from traditional supermarket competitors. "Pathmark should have the best results in the food retailing industry," Giblen wrote in research note last week.

"I think this is bad news for [Montvale, N.J.-based Pathmark competitor] A&P and other operators, and it won't change until external conditions change," Giblen added.

Scott said that Pathmark's competitors -- which include A&P, the Wakefern Food Cooperative, Elizabeth, N.J., and Quincy, Mass.-based Stop & Shop -- were all running aggressive promotions in reaction to a slow economy during the summer. "They're all going after that same top-line growth that we are," she said, noting that one competitor combined triple coupons and a four-day sale and another was offering more sale items at deeper discounts than usual.

Pathmark also encountered ongoing difficulty passing along its cost increases for commodity items such as beef, poultry and cheese.

Scott added that she did not expect the economic conditions to improve in the short term but said Pathmark's ongoing initiatives -- including store redesigns, shrink control, everyday low pricing of health and beauty products, a new baby club program and improved in-stock initiatives -- will help Pathmark's performance when conditions improve. "We're disappointed but not discouraged," she said.

Pathmark also said it is in the process of refinancing its credit facility and expects to have a new $250 million agreement with one of its current lenders.

"We're confident we can close the agreement in the next 30 days," said Frank Vitrano, chief financial officer. The company noted that because of its revised EBITDA guidance, it is probable that the company would not be in compliance with certain covenants of its existing credit agreement and could result in default.

2ND-QUARTER RESULTS

Qtr Ended: 7/31/04; 8/2/03

Sales: $1.01 billion; $995.6 million

Change: 1.6%

Comp-store: 1.3%

Net Income: ($1.6 million); $6.2 million

Change: NA

Inc/Share: (5 cents); 21 cents

26 Weeks: 2004; 2003

Sales: $2 billion; $2 billion

Change: 0.1%

Comp-store-: 0.1%

Net Income: ($3.4 million); $7.1 million

Change: NA

Inc/Share: (11 cents)24 cents