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A&P Calls Negative Q2 Showing 'Respectable'; Touts Healthy Balance Sheet for Future

MONTVALE, N.J. -- "Respectable under trying circumstances, though not good in and of themselves." That's how Christian Haub, executive chairman of the Great Atlantic & Pacific Tea Co., Inc. characterized his company's second quarter performance, which included dips in total sales and comps, but improvements in net profit due to the sale of the Canadian division.

Second-quarter sales for the chain, based here, were $2.2 billion compared with $2.5 billion in the year-ago period. Comparable-store sales in the United States decreased 1.1 percent vs. last year. Because of Hurricane Katrina's impact, comparables for the quarter and year to date exclude the sales of the New Orleans business, the company said.

Haub noted that sales were below expectations, but he also pointed out that comparable-store sales in A&P's core Northeast markets were only slightly negative, in line with those of its competitors.

In a conference call yesterday, Haub said such factors as steadily rising fuel prices, unusually hot weather that discouraged outdoor entertaining, and meat consumption decreasing as consumers abandoned low-carb diets, contributed to the company's performance in the quarter and year to date.

Another reason for the disappointing quarter was internal: A&P's major strategic restructuring, which has so far led to the divestiture of most the company's Midwestern stores and the sale of the A&P Canada division, is still proceeding, as is its transfer of supply and logistics operations to C&S Wholesale Grocers in Keene, N.H. Haub conceded that such major changes could not help but cause some "disruption" to A&P's operations.

The company's officers were downright giddy, however, when it came to discussing the company's current financial strength and outlook. "A&P easily has one of the strongest balance sheets in the business," noted outgoing c.f.o. Mitch Goldstein, who will be succeeded by rising company star Brenda Galgano. A&P's financial health is largely attributable to the A&P Canada sale, which allowed the company to pay off most of its debt, according to its officers.

Indeed, net income for the quarter--at $592 million, or $14.40 per diluted share, as opposed to a loss of $1.67 per diluted share last year--includes a gain of $919 million relating to the A&P Canada sale, less charges totaling $152 million for items such as $71 million connected with Midwest exit costs; $29 million related to early extinguishment of debt; $25 million in restructuring costs, including the sale of the distribution operations to C&S; $12 million related to the Canadian hedging agreement; $10 million related to impairment charges on long-lived assets; and $5 million related to Hurricane Katrina.

Sales for the 28-week year to date were $5.6 billion compared with $5.8 billion in the same period of fiscal year 2004. For the first half, U.S. comparable store sales, excluding New Orleans, went down 0.7 percent. Net income for year to date 2005 was $503 million, or $12.47 per diluted share vs. a loss of $2.78 per diluted share for 2004.

Haub said, "We made major progress during the quarter in restructuring the company and forming the basis for a new and sustainable A&P. Proceeds from the sale of A&P Canada completed during the quarter are being utilized to strengthen our balance sheet and improve our stores, and our investment position and relationship with Metro, Inc. in Canada is generating income and other benefits that we believe have significant upside potential going forward."

"In addition, the previously announced transfer of distribution operations to C&S Wholesale Grocers proceeded as we substantially reduce costs, improve supply chain performance, and focus management and other resources strictly on our retail business."

"Overall, our substantially improved balance sheet and lower cost structure now positions us to restore profitability to our business, and to consider strategic opportunities that are emerging in our industry."

Added president and c.e.o. Eric Claus, "Our actions in the first half set the stage for a leaner, more efficient, and effective company going forward. And we continue to move aggressively to reduce costs and improve productivity. As the second half progresses, these actions will enable a retail strategy that positions our conventional, fresh, and discount store formats to not only build our own loyal customer base, but also attract new customers. It is the effective execution of these actions that will continue A&P's turnaround to creating sustained profitability."

During the conference call, Claus outlined his "high-level vision" for the company, which includes a culture change to eliminate what he called "the overanalysis that leads to paralysis" by employing "fewer…but more efficient" people with accountability for their actions. His three stated major objectives were to significantly reduce costs, administrative and otherwise; drive the top line significantly and profitably; and bringing the company's retail asset base to 75 percent of its stores at standard in each format A&P operates, by fiscal 2008.

In trading yesterday, A&P's share price gained 11.6 percent on news of the profit spike. The stock closed at $28.29, up $2.93.

A&P operates 417 stores in 10 states under the following banners: A&P, Waldbaum's, The Food Emporium, Super Foodmart, Super Fresh, Farmer Jack, Sav-A-Center, and Food Basics.
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