PENN TRAFFIC TURNAROUND TO GO ON WITH NEW STEPS

ELLIOT ZWIEBACH

SYRACUSE, N.Y. -- Penn Traffic Co. here said last week it has completed the first phase of its turnaround strategy and is embarking on a series of proactive moves in its core markets that could affect its shortterm profitability.

The company said third-quarter results will probably be impacted by the introduction of a loyalty card program this month and start-up costs associated with the reopening of nine New England stores -- although both programs are expected to have positive longterm effects, company officials indicated.

The remarks came in the wake of the release of financial results for the second quarter and first half ended July 29, which showed a slight decline in sales and an increase in operating cash flow.

Referring to the company's emergence 14 months ago from Chapter 11, Martin A. Fox, executive vice president and chief financial officer, said the company is beginning to move into a new period.

"Now that we have completed the first phase of what we believe will be the company's return to operational and financial excellence, our strong financial position enables us to make the right longterm decisions to continue to invest capital in our core markets and proactively launch programs that have shortterm costs but which we believe will build our business for the long term," Fox noted.

The company said those programs include the launch of a loyalty card at its 70 Big Bear stores and the reopening of nine New England units.

The loyalty program, called "Wild Card," was scheduled to be introduced yesterday in Ohio following successful testing at Big Bear's West Virginia locations. Joseph V. Fisher, president and chief executive officer, said it will be the first loyalty card offered in the Greater Columbus area.

Offering the card "enables us to increase customer loyalty and focus more promotions on our best customers," Fisher said, "and assuming we are pleased with the results, we will consider introducing a loyalty card in other markets in the future."

However, he cautioned that the introduction of the loyalty card program "is a significant investment that will have an impact on third-quarter income."

Fisher also said Penn Traffic reopened nine stores in Vermont and New Hampshire on Aug. 1 under the P&C banner. Those stores had formerly been leased for 10 years to Grand Union Co., Wayne, N.J.

"Early indications suggest that consumers are welcoming P&C back with open arms," Fisher said. "However, as would be expected for a project of this magnitude, we are incurring considerable one-time start-up costs, so even though we expect this group of stores will be solid profit contributors in the future, we are anticipating they will not make a contribution to operating cash flow results in the third quarter."

Fisher also said Penn Traffic has been able to increase service levels to customers following the conversion of its Jamestown, N.Y., distribution center to a nonfoods facility during the second quarter. "The transition went smoothly," he said, "and our stores and wholesale customers have been very pleased with the high service levels the (warehouse) has been providing."

He said PennTraffic expects to realize annual cost savings of approximately $2 million from the warehouse consolidation.

Fox said the company's $100-million, 18-month capital expenditures program is on schedule, with the company already having spent $63 million to complete 14 major remodels and several smaller projects in the first 12 months. He said the company is on schedule to complete 10 more major projects during the next six months.

Most of the efforts so far have involved Big Bear stores, Fox pointed out, "but going forward we will be investing in all banners in all regions, with much of next year's budget weighted to new and replacement stores."

Penn Traffic said sales fell 0.5% to $629.7 million for the 13-week second quarter and 2% to $1.2 billion for the half, while same-store sales rose 1.3% during the quarter. The company did not release same store sales numbers for the half

Operating cash flow rose 12.7% to $28.2 million for the quarter and 24.4% to $50.4 million for the half, while net income, excluding special charges, was $4.3 million, or 21 cents, for the quarter and $5.1 million, or 25 cents, for the half. The special items included a noncash charge of $23.7 million for amortization of excess reorganization value and an unusual item of $900,000 associated with implementation of the warehouse consolidation program.

The company said it attributed the rise in operating cash flow to the increase in same store sales; an increase in allowance income from vendors, and the benefits of various cost-saving initiatives, including reduction of shrink and bad-debt expenses, which was partially offset by increases in promotional spending and the launch of new capital projects.