A&P's Q2 Losses Tied to Summer Slump

MONTVALE, N.J. -- The Great Atlantic & Pacific Tea Co., Inc. here found itself under the weather in its second quarter. The chain said yesterday that sales and profits for the 12 weeks ended Sept. 9 suffered due in part to "unusually difficult" weather conditions that included a severe heat wave and incidents of flooding.

The net loss was $511,000, versus a profit of $592 million for the year ago period. The previous period included a gain of $919.1 million from the sale of A&P Canada to Metro Canada.
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A&P said total sales for latest quarter were $1.57 billion compared to $2.2 billion. Last year's financial results included $600 million from the A&P Canada division, and excluding that contribution, U.S. sales dropped to $1.57 billion, from $1.6 billion.

Comparable-store sales for the latest period inched up 0.2 percent.

Besides citing the weather, A&P said results were dampened by the increasing number of stores it as been renovating as part of an ongoing rejuvenation strategy.

Sales for the latest 28 weeks were $3.7 billion, as opposed to $3.8 billion in the year-ago period. Total sales of $5.5 billion for last year included sales of $1.7 billion connected to the sale of A&P Canada. Total comparable-store sales edged up 1.0 percent. Net loss for year to date 2006 was $6.6 million, or 16 cents per diluted share, vs. income of $502.7 million, or $12.47 per diluted share, last year, including the gain on the sale of the Canadian division.

"A&P's turnaround continued in the second quarter, with our cost control and sales development strategies again improving operations and results despite competitive and other external challenges," said A&P executive chairman Christian Haub in a statement. "Our performance once again underlines my confidence in our continuous improvement, toward the goal of overall profitability in fiscal 2007."

In a conference call yesterday Haub also admitted, "Obviously, we're not satisfied, and won't be until we achieve sustainable profitability." He added that the company was still on track to reach that goal in fiscal 2007.

Haub referred to the company's store revamps as his company's "center-stage marketing conversions," which he expected "to drive breakthrough results in the next several years." Haub said he was particularly excited about the fresh and discount formats, which, once perfected, would be "two powerful and distinctive weapons to drive profitable market share growth."

As it is, fresh and discount store conversions are averaging double-digit sales lifts in the high teens, according to the company.

When asked about consolidation in the company's core Northeast market, Haub carefully sidestepped, noting that "a strong...successful operating strategy provides the foundation for successful acquisitions and consolidation." He also said that the company had no plans "to do anything different" with its problematic Michigan and New Orleans markets.

Chain c.f.o. Brenda Galgano said during the call that the company's full-year capital expenditure investment was expected to be in the "$200 million range," with 65 fresh stores, eight Food Basics (discount) stores, and one Food Emporium (gourmet) store.

"We remained on course in the second quarter, further reducing our operating loss while increasing comparable-store sales," added president and c.e.o. Eric Claus. "Although summer weather extremes impacted our rate of sales growth compared with prior quarters, our fundamental merchandising and operating strategies kept us moving in the right direction. Going forward, we remain focused on those strategies and the ongoing improvement of top- and bottom-line results."

Claus pointed out that comparable-store sales had been adversely affected by the still struggling Michigan market, which the company was hoping to improve through "basic merchandising and marketing changes" and the rollout of newly formatted stores in the third quarters. Another blow to comps was delivered by the New Orleans market, which, as A&P's competitors get up to speed in the year following Hurricane Katrina, is experiencing "double-digit ID sales declines" for the foreseeable future.

However, Claus was optimistic about the company as a whole, particularly in the area of format development. He characterized the new flagship 59th Street Bridge Food Emporium store, set to open in Manhattan toward the end of next month, as "something to see," with two other gourmet locations to come early next year, and promised a "newer and even more exciting fresh format" to debut in the first quarter of 2007.

Claus further mentioned a new training initiative that would take the form of a certification program awarding certificates to "experts" in various departments in the stores. When the issue of using information derived from loyalty cards arose, Claus noted that although a lot of target marketing based on such information had been done in Canada, it most likely wouldn't be implemented in the United States before 2008, as the company had a lot of other issues to deal with first.

A&P operates 403 stores in nine states and the District of Columbia under the following trade names: A&P, Waldbaum's, The Food Emporium, Super Foodmart, Super Fresh, Farmer Jack, Sav-A-Center, and Food Basics.
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