ALBERTSON'S EXPANDING COMBO STORE CONCEPT

ELLIOT ZWIEBACH

BOISE, Idaho -- Albertson's here said last week it intends to expand its dual-branded combination stores to additional markets following successful conversions in November of separate supermarkets and drug stores under the Albertson's-Osco banner in Tucson, Ariz., and Albertson's-Sav-on in Reno, Nev.

Peter Lynch, president and chief operating officer, and other Albertson's executives spoke about the co-branding initiative during a conference call with securities analysts to discuss financial results for the third quarter ended Nov. 1.

Albertson's said it will sell 80 Osco Drug stores in Maine, Massachusetts and New Hampshire to Brooks Pharmacy, Warwick, R.I., a wholly-owned subsidiary of the Jean Coutu Group, Longueuil, Quebec, which operates 250 stores in six New England states and a similar number in Canada, mostly in Quebec.

Also last week, Albertson's said the $240 million transaction is expected to close in January, pending government review, final inventories and other adjustments.

Speaking during the conference call, Lynch said Albertson's based the combo-store concepts on its Chicago-area Jewel-Osco format, "which has proven consistently successful in outperforming traditional competitors and competing effectively with supercenters."

Albertson's relocated seven Osco drug stores in Tucson and eight Sav-ons in Reno under the same roof of nearby Albertson's units on Nov. 7, "and the early consumer reaction has been extremely positive," Lynch said. "Consumers come in and find the drug store side is better than before, with the same food store as before, so the overall consumer experience is better in driving results."

Albertson's decided to expand the dual-branded format "because all research from Chicago indicates dual branding makes significant sales increases possible, and we believe that, with minimal investment, we can increase our drug store presence in a marketplace and increase grocery sales."

Research also shows pharmacy customers traditionally spend 25% more in grocery stores than non-pharmacy customers, Lynch added.

He did not specify where additional dual-branded combination stores might open.

Lynch also said Albertson's is committed to retaining its Florida operation, despite industry speculation that followed the announcement that it would sell two Miami-area stores to Publix Super Markets, Lakeland, Fla., and one to Miami-based Sedano's. "We're exiting those three stores because we have a weak share in the Miami market, but observers should not extrapolate three stores into 120," he said.

"Florida is one of our key strategic markets, and we plan to invest $250 million there in the next year and a half, so it's a high-growth market for us and one of our strategic markets of choice."

The company said sales rose 4.1% to $9.4 billion for the 13-week quarter and 3.9% to $28.3 billion for the year to date; and net income, including restructuring and other charges, increased 2.3% to $176 million for the quarter and fell 61.3% to $211 million for the year to date.

Comparable-store sales rose 2.3% for the quarter; the company does not release comp results for the year to date. In response to a question, Larry Johnston, chairman and chief executive officer, declined to break out grocery sales from drug-store sales in the comp number, but said food comps have improved over second-quarter results.

Lynch said Albertson's plans to increase promotional activities in the same markets as it seeks to achieve a comparable-store sales increase of 2% for the fourth quarter, "but with our focus on profitable sales, it may be harder to achieve 2% in the fourth quarter."

Johnston said the company expects to achieve sales of $38 billion for the fiscal year ending Feb. 1, with earnings per share of 56 cents, in line with consensus estimates. "We have strengthened our position in key markets, and we have not yet seen results for all the initiatives we're working on," he said.

He also said Albertson's is on schedule to reduce costs by $250 million by the second quarter of next year.

Asked about Albertson's pricing levels, Lynch replied, "We're at parity [with the primary competitor] in 15 of our 20 major markets and closing the gap in other markets."

In other comments during the conference call:

Johnston said Albertson's has closed about 25% of the 165 stores targeted for closing under its restructuring program, with the balance due to close in the next three quarters at a rate of about 40 stores per quarter.

Lynch said the chain introduced its Preferred Card program in the Dallas-Fort Worth marketplace on Nov. 7, with plans to introduce the loyalty cards in other targeted markets.

Lynch said the company has introduced Albertsons.com into the San Diego market in late October. "We're very encouraged by the early results, and we could expand it to additional markets," he said. Albertson's introduced the brick-and-click, Internet home-shopping model in its Seattle operation in late 1999.

Johnston said Albertson's has authorized the company to purchase and retire up to $500 million of its common stock by the end of 2002. Under a prior stock purchase program, which ended last week, the company purchased and retired 18.7 million shares at a cost of $451 million.

Johnston said the company intends to make all store and pharmacy managers eligible for stock options.

In response to a question, Lynch said the company has seen some trading down among consumers, "but not an extreme amount. But that's provided us with an opportunity to reach out to consumers with promotional activity, including center-store promotions, which resulted in some growth in the grocery department during the third quarter."

Johnston said Albertson's has also seen an increase in private-label business, "which is another indication consumers are looking for value." He said private-label penetration is at about 17%, "and we're on our way to reaching the goal of a 10% increase that we targeted for the year."