PENN TRAFFIC AIM: REGAIN CONSUMER AND INVESTOR FAITH

MARTY SONNENFELD

SYRACUSE, N.Y. -- As supermarket retailer and food wholesaler Penn Traffic Co. here emerges from Chapter 11 bankruptcy protection, the company is setting plans in motion aimed at restoring customer and investor confidence.

Penn Traffic's Joint Plan of Reorganization was confirmed by the U. S. Bankruptcy Court for the District of Delaware just before the Memorial Day weekend, and the company anticipates its reorganization plan will be effective early this month.

Some securities analysts are skeptical about the company's chances of regaining the strong position it held 10 to 15 years ago, but others are expressing cautious optimism. "Given the position they're in, it's a huge accomplishment to come out of bankruptcy with a better balance sheet than when they went in. It gives them a fighting chance to be a competitive food chain again," said Chuck Cerankosky, senior vice president of McDonald Investments, Cleveland.

Ted Bernstein, director at Grantchester Securities, New York, noted, "Redistribution of the balance sheet gives the company greater financial flexibility. It will let them remodel, and do some aggressive promotions and advertising. But they're still fighting a multifront war against tough competitors."

Bernstein said Penn Traffic got into trouble because "the company was over-leveraged and the tide turned against them. Competition was extremely difficult in their market by well-capitalized companies." He cited Kroger Co., Wegmans, Weis Markets and Ahold.

Cerankosky concurred: "From reading SN and seeing [Penn Traffic's] sales and earning reports, it's hard to recall anything that was positive. It was coming -- it was just a matter of time."

Apart from the fortunes of the company itself, Penn Traffic shareholders will be dealt a substantial blow under the reorganization. Each 100 shares of existing stock will be converted to just one share of new stock.

"A lot of warehouse and transportation people, and many other employees, have been putting in $50 a week for stock for years, and we've all taken a big hit," said Gary Staring, president of Syracuse Local 317 of the International Brotherhood of Teamsters. The local's labor agreement with Penn Traffic goes through February 2001.

"But, it's really interesting that I'm not hearing a lot of complaints about it. They're happy to see the company going forward," Staring said.

Grantchester's Bernstein maintained that "shareholders are lucky to be getting anything; the bond holders aren't getting 100 cents on the dollar." Bernstein estimated that holders of senior notes will get "somewhere between the high-50 and low-60 cents on the dollar" and that senior subordinated note holders "will see about 5 to 6 cents on the dollar."

Cerankosky suggested: "The big question is: 'Has the company gone through too much turmoil to regain momentum?' That means management turmoil, under-investment in their physical plant, and damage in the public relations sense to customers' impressions of the business because of the bankruptcy filing."

Reza Vahabzadeh, vice president at Credit Suisse First Boston in New York, also cited the company's history.

"It helps Penn Traffic to have a reduced debt load, but this company still needs to reverse years of same-store sales erosion." In order to rebuild its market share, Vahabzadeh noted, "this company needs better store-level execution and, with a reduced debt load, they can spend more money on their stores."

Indeed, company spokesman Marc Jampole told SN that "Penn Traffic will be investing $100 million over the next 18 months to enlarge or remodel existing stores, as well as on new construction."

He said the company can win back customer confidence "through giving them what they need at good prices and good locations. We will continue improving service and operations."

Jampole said that the company has identified stores where it believes new investments would spur higher sales. "Compared to a year ago, we're down to 214 stores, but they're strong stores." Plans include a new Bi-Lo store in DuBois, Pa.; major remodeling of a P&C store in Ithaca, N.Y.; and enlargement of a Charleston, W. Va., Big Bear supermarket.

In addition to its physical plant, Penn Traffic is also taking steps to rebuild its board of directors. Jampole said Gary D. Hirsch, the company's chairman, would step down, although he would not disclose who will succeed Hirsch. However, Hirsch told SN he would remain a board member and chairman of the board's executive committee. Moreover, under a lucrative arrangement, when Penn Traffic's reorganization plan takes effect, the company will retain Hirsch's services through Hirsch & Fox, a firm of which Gary D. Hirsch is principal. According to Penn Traffic's 10K, Hirsch & Fox will be paid at the annual rate of $1.45 million. "Fox" refers to Marty Fox, previously Penn Traffic's vice chairman, who is to be vice chairman of the executive committee and a board member. New board appointments include Thomas Harberts, a director of Kash n' Karry Food Stores, and Byron Allumbaugh, the retired chairman of Ralphs Grocery Co. Joseph V. Fisher will continue as president and chief executive officer.

But to build a new momentum, Penn Traffic's labor force, which Jampole said consists of about 19,000 total employees, represents a critical component, and analysts widely agree that concessions will need to be made.

McDonald Investments' Cerankosky stated, "Obviously, no one wants a pay cut, but you can be sure that the union leadership wants to see the company survive, and for Penn Traffic employees to continue as union members.

"So they may be open to offering concessions, but then Penn's competitors, who are organized in the same markets and probably have pretty similar agreements, are also going to want concessions. The unions may say 'We'll help you now, but you'll have to make us whole after some period of time.' "

Ted Bernstein observed, "Renegotiating labor contracts is usually part and parcel of reorganization, and every kind of labor concession they can get will save jobs."

Teamsters' Staring confirmed that company management has approached his local, although no formal discussions have yet taken place. He said that Local 1 of the United Food and Commercial Workers, the union that represents many in-store workers, voted down a proposal that would have granted $2.6 million in concessions.

Three years ago, Teamsters Local 317 had agreed to wage and health care concessions that Staring said would save the company at least $10 million over a five-year period. As for now, Staring offered, "If we can do something to help them we will. We can talk about an extension of a couple of years if it will help them to better project. They may be receptive to giving up some work rules here and there, maybe there's something that can help us both out."

Staring said his members are largely optimistic about Penn Traffic's viability. "We were one of the most productive warehouses in the country back in the 1980s and early 1990s, until the business started to slide. Now we're operating at 30% to 40% capacity. Our people are ready to help bring it back."

Penn Traffic has already taken some steps toward renewing its image within the community. Staring reflected that the company used to trot out a beloved team of horses, much like the famous Budweiser stable, at fairs, festivals and parades, but that such strides were eliminated when the company hit hard times.

"Now, they appear to be getting more involved again in the community," Staring noted. As an example, he cited the company's sponsorship of a high-profile Shania Twain concert. "She's big into collecting food, so they're doing a promotion with a radio station, bringing a trailer all around the city."

Though clearly aware of the challenges, Jampole said Penn Traffic is fully optimistic. "What investors like is a company that grows. We ran into some difficulties, we've addressed them, and we're enthusiastic about moving forward."