PENN TRAFFIC CEO RESIGNS; SOME EXPECT RESTRUCTURING

ELLIOT ZWIEBACH

SYRACUSE, N.Y. -- Penn Traffic Co. here said Phillip E. Hawkins has resigned as president and chief executive officer -- a development observers believe may reflect the need for some kind of restructuring.

Gary Hirsch, Penn Traffic chairman, told SN last week the company has "no plans, no desire and no intent" to restructure.

The company said Hawkins left after less than 17 months "to pursue other interests." Hawkins could not be reached for comment last week.

Penn Traffic said Claude J. Incaudo, a director and the company's former president and CEO, will become acting president while the company seeks a successor. Incaudo said he will keep the focus on "quality products, competitive prices, great service and a low cost structure."

Securities analysts told SN the outcome of the debt-laden Penn Traffic's efforts to sell its 78-store Bi-Lo division in Pennsylvania could hold the key to the company's future. Asked by SN about the progress of those efforts, Hirsch said he could not comment "in the middle of the process."

Weis Markets, Sunbury, Pa., declined comment last week on reports it is interested in the larger Bi-Lo units, and Supervalu, Minneapolis, declined comment on reports it is interested in some of the smaller locations.

"Selling the Bi-Lo assets is Penn Traffic's most vital concern," said Howard Goldberg, a high-yield analyst with Salomon Smith Barney, New York.

"It's been more than two months since the company announced it had hired an investment banker and was seeking a buyer for those stores, and that seems a long time not to reach some conclusion, which suggests either that the company is about to make an announcement or that it's gotten nowhere. And the implications of the latter are unfavorable."

According to an analyst who asked not to be identified, "Everything is tied to the sale of the Bi-Lo assets. If Penn Traffic does sell some assets, it will have enough cash to put a Band-Aid on a patient that's hemorrhaging, and if it sells all the Bi-Los, that may be equivalent to three or four Band-Aids.

"But if there's no asset sale, then without a liquidity event or miraculous turnaround in earnings, it's hard to see how Penn Traffic has the luxury of a lot of time to resolve its problems."

Bob Lupo, an analyst with BA Securities, Chicago, said he finds it "troubling" that Penn Traffic has not been able to sell the Bi-Lo assets yet.

"But beyond that, Penn Traffic's capital structure is unacceptable, and it's doubtful anyone could stop the inevitable -- a debt restructuring -- from happening. The company's capital structure is debt-laden, and it must dramatically restructure its balance sheet to move forward.

"But there's no imminent trigger for a restructuring, unless Penn Traffic can't sell assets, which would raise serious issues with the banks -- because if the banks aren't paid, they're less likely to ease up on any covenants. And with Phil Hawkins gone, the banks, and possibly the trade, could be spooked."

Lupo said the company could restructure by doing a debt exchange with its bondholders, in which they would receive new debt and equity securities, "though that is difficult to accomplish." Another alternative would be a court-directed restructuring, he said.

Ted Bernstein, an analyst with Grantchester Securities, New York, said he is pessimistic about the company's prospects. "The fixes it has tried to implement have had extraordinarily limited success, despite all we've heard about a potential turnaround and better trends.

"So I don't see much of a future for Penn Traffic, certainly not under its current capital structure. I'm not sure if it will consider a Chapter 11 restructuring, but I think it may have to."

Another analyst who asked to remain anonymous said, "A restructuring is imminent. But first the company must focus on paring down its store base or cutting costs to improve cash flow to stabilize the business.

"But with more than $1 billion in debt on its balance sheet, Penn Traffic will have to restructure because it can't continue to exist and make the necessary investment in its store base with that kind of leverage."

Hawkins joined Penn Traffic in March 1997 after 29 years with Vons Cos., Arcadia, Calif. At the time he joined, Penn Traffic had just completed its 1997 fiscal year with sales down 6.8% to $3.3 billion and same-store sales off 3.4%.

His biggest challenge, he told SN at the time, was "to get sales back again," which he said he planned to do by using "everything I've seen and learned in merchandising, operations and marketing techniques."

Among the initiatives the company said it was pursuing were improving the selection of promotional items, with added emphasis on in-stock conditions at store level; improving communications with customers; removing costs from the system and investing them in merchandising, and developing a corporate culture that encouraged better employee performance.

Hawkins said he hoped those initiatives would enable the company to begin reversing its financial fortunes before the end of 1998, which he said would be a reasonable timeframe in which to see improved results.

Penn Traffic said last December that reductions in cost structure and promotional efforts to rebuild sales were showing signs of paying off. "We believe we now have an appropriate pricing structure to improve sales trends," Hawkins said at the time.

He said then the company was pleased with initial customer reaction to its marketing programs and improved store operations. "We continue to believe that our efforts will only pay dividends after proving to our customers and employees, over time, that we really are listening to them and are becoming in every way the store to shop.

"We expect that our dramatically improved cost structure will allow us to maintain acceptable levels of financial performance in the near term while we continue to rebuild our sales base."

However, at the end of the 1998 fiscal year last February, sales were down 8.7% to $3 billion and same-store sales were down 8.2% for the year.

In the first quarter of fiscal 1999, ended May 2, sales were down 5.6% and same-store sales were down 4.1%.

Bernstein said Hawkins' resignation "is a very bad sign and an indication, if any more was needed, that things are not turning around at Penn Traffic and they're unlikely to get any better.

"There's no way this move can be seen as a positive in any possible way. The fact is, the guy Penn Traffic thought would turn things around didn't work out, and the company will be hard-pressed to find anyone else to fill the job on a permanent basis."

According to Goldberg, "Hawkins came in as the gunslinger from the West, a high-priced hired hand, but he was unable to get the job done and the record speaks for itself.

"He seemed to pursue a program for a slow but steady turnaround that never materialized at a time Penn Traffic needed energizing.