PENN TRAFFIC BREAKS ITS SILENCE

JON SPRINGER

SYRACUSE, N.Y. - Penn Traffic Co. broke a long silence last week to reveal that sales and earnings were running below prior projections; to introduce new leaders detailing ambitious plans to improve those figures; and to begin a dialogue with investors anxious for details and quick with suggestions.

Penn Traffic, which emerged from a lengthy bankruptcy in 2005, had not reported quarterly or annual financial figures since fiscal 2002, citing ongoing government investigations into past accounting practices. The figures the company shared last week were preliminary and unaudited, but at least are no longer a complete mystery to investors, some of whom had grown impatient waiting for them.

Asked by SN what was most significant about the conference call, one investor quipped: "The fact that there was a beating heart at the other end of the line.

"I've been trying for years just to try to get them to say 'hello,'" the investor, Robert Koltai of Hain Capital, Rutherford, N.J., added. "It was a pleasure just to get an update."

During the 90-minute conference call, Penn Traffic executives said:

That the company has initiated a series of short- and long-term strategies to improve competitive positioning, sales and earnings.

That the company would be open to talks with private equity firms on a possible buyout or other transaction.

The federal accounting investigation has cost Penn Traffic $6.2 million and an additional $3.5 million in fees to its former auditor. Officials added they do not know when the investigation will be complete.

Losses of $5.5 million on sales of $1.8 billion since emerging from Chapter 11 bankruptcy in April 2005, with comparable-store sales declining 1.6% to 1.7%.

It discontinued using Demand-Tec, a price-optimization software program, in January after the executives who had championed it were terminated. Margins subsequently declined and the company is currently reinstalling Demand-Tec, which officials think can add 1% to margins when fully capable next year.

"There's nothing major broken here that can't be fixed by bringing a new focus and accountability to the company," Robert Kelly, chairman of the board, said.

Greg Young and Bob Panasuk, former co-workers at A&P and the newly named co-chief operating officers of Penn Traffic, said they would focus on tactics to boost sales and reduce expenses in the short term, while formulating a longer-term framework to realign the company and its strategies.

"We find ourselves highly compatible and in this role I think we can do a lot," said Panasuk.

Among the operational short-term tactics are plans to improve margins by tweaking the mix and emphasis at stores toward higher-margin categories such as candy; introduce a second-tier private-label offering; improve store service during peak hours; and sharpen the company's defense and offense against competitors. Stores will also pursue sales from a slate of 10 to 12 "signature items," such as pizza, to drive differentiation, Panasuk said.

Short-term cost-control initiatives include adapting benchmarks for expense analysis; initiatives to use on-line auctions for supplies and service contracts; an administrative staffing review; and rigorous investigations into profit and loss on the store level.

Over the longer term, Panasuk and Young said they would look to further refine the fresh store offering, and analyze and reassess various business segments and real estate.

"We need to be more diligent in our real estate review, and perhaps less emotional, to make good decisions on markets that we should be in and markets that we shouldn't be in," Panasuk said. "Where we have underperforming stores we have to make the hard decisions to either close them or make them profitable again."

Koltai of Hain Capital said he was impressed by comments of the new leadership at Penn Traffic. "They sound smart and committed and seemed to work together well."

Financial details were reported in two parts: for the 39 weeks from its emergence from Chapter 11 in April 2005 to the end of its fiscal year Jan. 28, 2006; and for the 34-week period from Jan. 29 to Sept. 23 of this year.

In the more recent period, the company reported a loss of $3.5 million on sales of $849 million and comparable-store sales declines of 1.7%. For the 39-week period ending in January, Penn Traffic lost $2 million on sales of $969 million, with comps declining by 1.6%.

Several investors on the call appeared surprised by what they called high interest rates on company debt. One caller suggested Penn Traffic officials re-work its debt with his firm.

Others appeared frustrated trying to project annual rates when given results only from parts of two fiscal years. Penn Traffic officials refused to provide guidance on earnings, or expectations of full-year measures such as EBITDA and margin percentage.

Penn Traffic said it would conduct another conference call in January after audited financials are released.