SUPERSTORES DEVELOPMENT TO FUEL A&P RESURGENCE

DAVID ORGEL

MAHWAH, N.J. -- A&P's resurgence will rely heavily on the results of its ambitious superstore development program, Christian Haub, president and co-chief executive officer, said last week at the company's annual meeting here.

Haub, who will become the company's sole CEO about the close of the current fiscal year, said A&P has set 150 new superstores by the year 2000, a plan that will keep the company's comeback on course.

"New stores will be the lifeblood of our success over the next several years," he said. "We believe that our new generation of superstores are truly state-of-the-art and at least equal to the best supermarkets in each of our many trading areas."

Haub said the successful maturation of these new stores "will help lead our earnings back to the level we achieved in 1990." In that year, Montvale, N.J.-based A&P earned $3.95 a share, but problematic acquisitions and labor troubles severely cut away at the bottom line in the early 1990s. The company has recently been reversing that trend. In the most recent fiscal year the company's net income grew 28% with a profit of $1.91 a share.

Also fueling this growth will be the company's remodeling and enlargement program for its existing store base, Haub added. He said the company's high cash flow "should enable us to fund this new store growth program internally."

A&P plans the bulk of its new store development in its core market areas, including Canada, Michigan and the Northeast, which incorporates the New York metro region and the Philadelphia area. However, there will also be some activity in other markets, including the Mid-Atlantic, Atlanta and New Orleans, a spokesman said.

Haub expanded on the company's real estate situation in an interview after the meeting. He said A&P has an advantage in the New York/New Jersey region vs. some competitors when it comes to attracting developers. The company's store development activities are led by Aaron Malinsky, executive vice president for development and strategic planning.

"We have the financial advantage in that, if necessary, we can do the projects ourselves," Haub said. "But on the other hand, we are a strong credit tenant, so a developer can easily get financing if he has A&P as his anchor tenant for a new development. Pathmark and Grand Union, particularly, with their heavily leveraged balance sheets, have a lot more difficulty in terms of getting the confidence from investors and developers to go forward on their projects. We have seen the opportunity where developers came to us and said, 'Here's a project. I have been talking with Pathmark or Grand Union, and we feel we would like to deal with you because we know you've built these great stores.' "

Store development has had the effect of "rebuilding A&P's image," he said in the interview. "A&P was not the most modern, most up-to-date store base. It didn't have the big 50,000- to 60,000-square-foot stores you'd find in Pathmark and ShopRite. As we build more of these stores, people develop the image of A&P as a very modern supermarket company."

Haub was also asked after the meeting whether, in the face of long-running reports that Grand Union or Pathmark might be sold, A&P might consider making such an acquisition. While Haub declined to rule out such a scenario, he said he couldn't comment on speculative reports. But he did say that industry consolidation could have an effect on those two players. "This industry is consolidating fast. They [Grand Union and Pathmark] are likely candidates to be absorbed by other players. And we have to look at those opportunities too.

"In the supermarket industry market share is very important. It gets you your leverage in terms of costs and advertising and distribution. And the more you dominate a market the more you're able to defend yourself against new entrants or a price war. We're not actively pursuing acquisitions, but certain in-market acquisitions that make great strategic sense for us we will look at closely," Haub said.

Officials at Grand Union, Wayne, N.J., and Pathmark Stores, Woodbridge, N.J., declined to comment on Haub's statements.

During the annual meeting, A&P's chairman and co-CEO, James Wood, defended the company's financial record in response to a shareholder's comment. The shareholder complained about a "dismal performance" for years and a poor return on investment, and charged the company was in need of new leadership. Wood, who joined the company in 1980 and will soon relinquish his CEO role, responded by pointing to A&P's successes, including 10 consecutive quarters of posting increased operating earnings per share over the comparable quarter.

"I think you have the wrong script," Wood responded. "What you're seeing now, and what you've seen for the past 10 quarters, is another resurgence of A&P, which is on much more solid ground. We've made changes in the management, and we have a new CEO due to take over at the end of this year." Another shareholder asked why the company's stock price has not reflected its turnaround efforts. In the first half of calendar year 1997, A&P's shares fell almost 15% during a period when the overall stock market was surging.

"Nobody really understands the stock market, me less than anyone," Wood responded. "Our current report was one of the more encouraging of the past six to seven years. It takes a while before the financial public recognizes what's happening with the company. Our stock price deserves to be a lot more than what it is."

As reported, the company's net income grew in the fiscal year ended Feb. 22, from $57.2 million to $73 million. Sales were $10.1 billion, about even with last year. In the first quarter ended June 14, A&P's net income rose 4.2% to $22.8 million and sales rose to $3.104 billion from $3.092 billion.

Haub told shareholders that in addition to new store development, A&P's strategic plan calls for excellent perishables, strong neighborhood merchandising and consistent emphasis on customer service. Cost reduction is also a prime area of focus, he added. "In a sluggish sales environment, controlling our costs is also very important towards achieving lasting success; and our first quarter continued our trend of a lower sales, general and administrative expense rate to sales," Haub said.

Debra Levin, an analyst with Morgan Stanley & Co., who attended the meeting, said management's approach appears to be working.

"I definitely believe that A&P is a turnaround story," she said. "In fact the low point in their operating earnings was in 1994 and they have improved since then. I expect the improvement to continue.

The fact that they are building more new stores and closing a greater number of the old, smaller, less productive stores means that on average their store base is improving."