PEAPOD'S SALES INCREASE, MARGINS IMPROVE

JON SPRINGER

CHICAGO -- Peapod here said its conversion to centralized distribution centers is resulting in better margins and increased sales. And though Peapod continues to lose money, analysts were encouraged by its most recent quarter.

Peapod reported sales for the fourth quarter ending Dec. 31 increased 25.4% to $21.6 million, while sales for the year increased 5.6% to $73.1 million. The company reported a net loss of $9.1 million for the quarter and $28.5 million for the year. Peapod lost $21.6 million in 1998.

"The revenue number was the critical one, and it was better than I had expected," Arvind Bhatia, senior equity analyst at Southwest Securities, Dallas, told SN. "Without revenue growth, they're going nowhere."

Peapod, which previously fulfilled grocery orders in all of its eight markets through local supermarket partners, said a year ago it would convert to centralized distribution models designed to increase efficiency and reduce costs. Conversions in San Francisco and Chicago in 1999 led to margin improvements of 25.4% vs. 21.8% last year, Bill Malloy, Peapod president and chief executive officer, said in a statement.

This year, the company will roll out the new 100,000- to 125,000-square-foot warehouses in its remaining markets, beginning with a 117,000-square-foot warehouse in Dallas set to open this spring. That center is being built under the expertise of The McLane Group, the Temple, Texas-based food distribution and logistics firm that announced a strategic alliance with Peapod in November.

Peapod also plans to expand its Long Island, N.Y., distribution center and open a new distribution center in Chicago this year. In 2001, Peapod will convert its Austin, Texas and Houston distribution centers and begin expanding into new cities at a rate of two new markets a quarter. The company intends to eventually free itself of its alliances with supermarket partners, said Keith Menzel, research analyst for John G. Kinnard & Co., Minneapolis, told SN.

Peapod recently signed letters of intent to receive a $120 million financing package from a group of investors, which will help facilitate the company's growth plans.

"We believe that the imminent financing and a more aggressive approach to growth are significant catalysts to the Peapod story," said Bhatia in a report. "The stage is now set for Peapod to take the bull by the horns. 2000 will be the year we expect the company to achieve significant growth."

During the fourth quarter, Peapod attracted 111,900 customers, an increase of 20%, and an average order of $117. Customers made 571,300 orders for the year.

Menzel said Peapod's fourth quarter was "considerably better-looking than the third quarter on all fronts," adding that Malloy, who joined Peapod from AT&T Wireless in late September, has had a positive effect in a short time.

The analysts cautioned that competition will be fierce, particularly in San Francisco and in Dallas, where Foster City, Calif.-based competitor Webvan has signed a lease.