A&P ASSET SALES BOOST PROFITS

David Ghitelman

MONTVALE, N.J. -- Asset sales in the first quarter boosted profits for A&P here, but industry observers last week noted that operating deficits pose a long-term problem for the company.

In the quarter ended June 14, A&P's net income rose 968.4% to $20.3 million, or 52 cents per share, vs. 5 cents per share in last year's first quarter, but the company noted that this profit was due entirely to asset sales.

As previously reported, A&P sold 17 New England stores and seven Wisconsin stores in the quarter.

Exclusive of discontinued operations (that is, the stores already sold as well as its Eight O'Clock Coffee brand and its 23 Kohl's stores in Milwaukee, both of which the company said it expects to sell this year), A&P had an operating loss of 53 cents per share in the quarter, compared with an operating profit of 11 cents per share in last year's first quarter.

In the quarter, sales rose 3.2% to $3.2 billion, and comparable-store sales declined 0.1%.

During a conference call with industry analysts to discuss these results, Mitch Goldstein, A&P's chief financial officer, said the sale of the 24 stores generated cash proceeds of $144 million, or "about half of the $300 million in asset sales we had targeted for the year."

He noted that the company's efforts to sell Eight O'Clock Coffee and the Milwaukee stores "are taking a little longer," but added, "We hope to accomplish them in the second and third quarter."

Goldstein said the completed sales "have significantly reduced our leverage and given us substantial cash-on-hand."

However, industry observers voiced concern about a possible over-reliance on asset sales.

Last week, on the first business day following the release of A&P's results, Moody's Investor Services, New York, said it believed A&P will have adequate liquidity to meet its short-term operating and financial needs, but the company will run a free cash-flow deficit over the next 12 months.

Moody's said it "does not regard the potential divestiture of operating divisions as a reliable liquidity source" for A&P, and the retailer instead needs to improve "its internal ability to grow revenue and operating profits."

Moody's assigned a speculative grade liquidity rating to A&P of SGL-3.

Concerns about the long-term viability of A&P's current operating strategy also surfaced during the conference call.

Asked if the company's capital spending budget for this fiscal year could sustain its business over a long period of time, Goldstein responded, "Certainly, the $175 million that we're at is probably below the level that over an extended period we would want to have." He noted that, historically, the company had been spending about $250 million a year to stay "one-to-one with depreciation."

He explained, "We have a lot of short-term and long-term needs that we're balancing. Capital is only one of them."

Other topics discussed during the conference call included:

The competitive environment. Christian Haub, A&P's chairman, president and chief executive officer, said, "All participants are fighting for their fair share of the market. Even though we did not experience a significant worsening, the competitive intensity has not let up."

Later, in response to an analyst's question about the competitive environment, Haub observed, "I would not characterize it as rational. It's just stable."

The revitalization of the company's Farmer Jack stores. Goldstein said the company incurred $5 million in costs, mostly for the buyout of about 200 full-time or full-time-equivalent positions, at its Detroit-based chain.

The slower comparable-store sales growth in Canada. Haub said although growth slowed, comps still "managed a strong 3.7% positive result" (compared with a decline of 1.1% in the company's U.S. operations). Haub attributed the softening of the Canadian results to heightened competition and the impact of SARS and mad cow disease.

The U.S. introduction of the Food Basics format. Haub said that at the end of the first quarter, the company had 11 Food Basics stores in the New York/New Jersey region; after the quarter, it opened its first Food Basics store in Philadelphia.

He commented, "We are excited about the future prospects of this concept, but guarded about its short-term potential, given the challenges associated with launching a new concept in a difficult market environment."

Haub added that A&P operates about 80 Food Basics stores in Canada, where the format originated and has experienced "tremendous success."