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New Pathmark C.E.O. Sees Potential Despite Disappointing Q2

CARTERET, N.J. -- Pathmark Stores, Inc. still has a way to go before it lives up to it's new management's high expectations, judging from the chain's disappointing performance in the second quarter ended July 30.

Pathmark said yesterday that poor performance in dairy, nonfoods, and pharmacy dragged sales for the quarter down 1.1 percent, to $1 billion, from $1.01 billion in the year-ago period. Same-store sales dropped 2.0 percent in the latest quarter.

The chain posted a net loss of $5.1 million, or 12 cents per diluted share, for the period vs. a net loss of $1.6 million, or five cents per diluted share, in last year's second quarter.

The latest results included a $2.8 million pretax charge in connection with the repayment of a $23 million mortgage. If not for this item, and a $0.2 million cost for strategic alternatives, Pathmark would have posted a net loss of $3.4 million.

Among other expenses during the second quarter was a $1.5 million severance charge related to former c.e.o. Eileen Scott's departure.

Still, new c.e.o. John Standley said in a statement released yesterday that he is "excited about Pathmark's potential" despite the fact that there are "some near-term challenges to overcome." He called the chain "a strong franchise with excellent locations and store volumes."

Standley noted that the second quarter's underwhelming sales performance was "a trend which has continued into the third quarter, [but we] have already begun implementing plans to improve in-store merchandising and product assortments, and to upgrade the look of our stores. Looking forward, Pathmark will become a stronger, consumer-driven company with better in-store execution and more compelling financial results."

During a conference call with analysts yesterday, the chief executive sounded even more upbeat, adding that he sees Pathmark as "a tremendous platform for growth," and that it presents even greater opportunities than he had first thought when he took the helm 10 days earlier.

Standley said a remerchandising program in all Pathmark' units would expand selection and variety of perishables departments, eliminate clutter, and use space more efficiently, thereby reducing inventory. He said the chain hopes to add kitchen centers, reading centers, dollar stores, party shops, toy departments, and meeting rooms to stores. The plan calls for a $12.2 million infusion, $8.5 million of which would be capital investments in store fixtures and improvements, while $3.7 million would expenses.

In the longer term, the company will focus on product placement and adjacencies, private label, and "how we communicate with our shoppers," including the Pathmark Advantage card, Standley said. Other major goals include greater efficiencies, store renovation, and new-store growth, he said.

Additionally during the call, the chain described plans for store labor buyout program that it hopes to implement in the next several weeks as a way to cut overhead costs. President, c.f.o., and treasurer Frank Vitrano said the buyout would be offered to "certain eligible union associates who meet or exceed certain seniority or hourly-rate requirements." He said the company expected that about 150 to 200 associates would take the buyout, and that Pathmark would replaced them with lower-paid workers.

The chain also reported performance for the first six months of fiscal 2005. Sales overall were essentially flat at $2 billion, while same store sales declined 0.9 percent in the six-month period. The net loss was $7.2 million, or 20 cents per share, in the first six months, as opposed to a loss of $3.4 million, or 11 cents. The results for the six-month period included a $1.1 million pretax expense relating to Pathmark's review of strategic alternatives, and a $2.8 million pretax charge for early extinguishment of debt. Excepting these items, Pathmark would have reported a net loss of $5.0 million.

Cash capital investments in the first six months came to $15.4 million. During that period the company renovated one store and closed one store. For the rest of the fiscal year, Pathmark plans to open two new stores, close one store, and renovate seven stores, and continue its investment in technology. Total capital investments for fiscal 2005 are expected to reach about $75 million.

Pathmark operates 142 supermarkets, most of them in the New York-New Jersey and Philadelphia metropolitan areas.
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