A LEANER PENN TRAFFIC EYES REORGANIZATION

ELLIOT ZWIEBACH

SYRACUSE, N.Y. -- Penn Traffic here said it expects the second time will be the charm, while industry observers expressed mixed feelings about the company's long-term viability.

After filing its plan of reorganization with the U.S. Bankruptcy Court here last week -- moving the company closer to emerging from its second bankruptcy in five years -- Penn Traffic told SN it believes the key to success this time is its total restructuring.

"The last time around, Penn Traffic went through a pre-negotiated bankruptcy that restructured the debt without adjusting the business and the expense levels," James A. Demme, chairman, told SN.

"The company didn't close nonperforming stores or renegotiate leases, and there was no significant reduction in operating costs or overhead and no facilities consolidation, all of which we've done this time."

Penn Traffic officials said they expect the court to approve the reorganization plan within 45 to 60 days and for the company to emerge in late October or early November from a bankruptcy that began in May 2003. The company said all creditors are behind the reorganization plan.

The court is scheduled to consider the plan at a hearing slated for Sept. 23.

Industry observers told SN the chain's strong locations should serve it well in the immediate future, but the expansion of Wal-Mart supercenters in its operating area could create long-term challenges.

"Penn Traffic's prospects are very good," Burt Flickinger, principal in Strategic Resource Group, New York, told SN. "It has successfully consolidated its operations and sold off the money-losing Ohio business [Big Bear Markets], and it has a strong nucleus of stores remaining in all areas.

He speculated that the company might seek to acquire adjacent chains -- possibly Ahold's Tops banner, Weis Markets or Pathmark.

Bob Gorland, vice president of the Harrisburg, Pa., office of Mathew P. Casey & Associates, Clark, N.J., a real-estate consulting firm, said Penn Traffic has "a lot of good, established locations throughout its trade area. But the rapid growth of Wal-Mart supercenters and the aggressive response from competitors like Wegmans and Price Chopper could have a negative impact on Penn Traffic. It could spell trouble for stores that are marginal performers -- unless the company makes a lot of investments in cap-ex and promotions.

"Otherwise, a store doing $250,000 [in sales per week] this year could drop to $235,000 next year and $220,000 the year after. But the good, established locations are a big plus, at least in the short term."

One local observer contacted by SN was more pessimistic. "Only a handful of Penn Traffic's stores could be described as decent, and very few of the rest are really viable," he said.

"With more pressure coming from Wal-Mart as it opens more supercenters, I don't know how Penn Traffic will hold up because they are generally the weakest player in the market. They're trying to pull their act together right now, but I don't see how they can be successful over the long term."

Demme said about one-third of Penn Traffic's stores compete with supercenters operated by Wal-Mart Stores, Bentonville, Ark., "and we're holding our own. We think our merchandising and marketing plans have enabled us to recover quicker from the impact of Wal-Mart."

According to Robert Chapman, president and chief executive officer, Penn Traffic operates stores as large as 65,000 square feet, though its stores average 45,000 square feet. "We believe the stores are in good locations and can compete for customers," he noted.

Penn Traffic will emerge as a company of 109 supermarkets in New York, Vermont and Pennsylvania operating under three banners -- P&C Markets, Quality Foods and Bi-Lo -- plus a bakery and a wholesale business, all combining for annual sales of approximately $1.4 billion, Demme said. The company expects sales to increase 2% a year for the first three years after the bankruptcy.

During the 15 months since Penn Traffic filed for Chapter 11 protection, the company has closed more than 100 underperforming stores and brought its store base down to the strongest locations within its Northeast core, Chapman told SN.

"Sales have improved," he said, "with same-store sales running ahead of the year-ago numbers."

Though Chapman declined to pinpoint sales specifically, he said aggregate same-store sales are up in the single digits, with some stores showing double-digit increases.

Those improvements are a result of merchandising, marketing and advertising systems "that have been completely revamped over the last eight months," Chapman said.

Penn Traffic has built its programs around the slogan, "Working Harder to Save You Money. To Serve You Better," with initiatives that include increased levels of customer service, a focus on low prices, and better-quality perishables, a chain spokesman told SN.

The company intends to continue to pursue cost-reduction programs, he added, "and it will be helped by the fact that all the stores remaining are strong now that it doesn't have so many underperforming stores dragging it down."

The company's post-emergence debt will stand at $88 million, compared with $337 million before the filing.

"The new Penn Traffic will have enough cash flow to pay down debt and still have substantial money available to invest in the stores," Demme said.

He said Penn Traffic expects to invest $25 million by the end of the fiscal year in January in 13 remodelings, four of which have already been completed; installation of point-of-sale register systems; and a variety of store enhancements, including new decor packages, equipment and painting.

Capital investments next year will total $35 million, Demme added.

Penn Traffic operates stores as large as 65,000 square feet, though its stores average 45,000 square feet, Chapman said. "We believe the stores are in good locations and can compete for customers," he stated.

"We believe the steps we have taken to improve liquidity and operating performance and to dramatically reduce our debt have put Penn Traffic on strong footing for the future."

Chapman made particular mention of the positive support Penn Traffic has received from suppliers throughout its bankruptcy. "They've been good to us and very supportive all the way through this process," he said.

Under terms of the proposed reorganization, the chain's post-petition secured lenders will be repaid in full approximately $26 million; holders of allowed unsecured claims amounting to $277 million will receive shares of newly issued common stock; and up to 10% of the new common stock will be reserved for management incentive stock grants.