Pathmark Posts Disappointing Second-quarter Results

CARTERET, N.J. - Citing poor economic conditions and tougher competition, Pathmark Stores, Inc. yesterday reported a loss for its second-quarter and six-month period ended July 31, leading to a lowered earnings forecast and a stock dive of more than 16 percent. Pathmark currently operates 142 supermarkets mainly in the New York/New Jersey and Philadelphia metropolitan areas.

Sales for the second quarter of fiscal 2004 were $1,011.7 million, a rise of 1.6 percent from $995.6 million in the prior year's second quarter. Same-store sales increased 1.3 percent.

The net loss was $1.6 million, or five cents per diluted share, in the second quarter of fiscal 2004, compared with net earnings of $6.2 million, or 21 cents per diluted share, in the prior year's second quarter.

Pathmark c.e.o. Eileen Scott said in a statement: "We had mixed results for our second quarter in what continues to be a difficult economic environment in the markets we serve, and in the face of increasingly aggressive promotional programs by our competitors. While same-store sales rose 1.3 percent as a result of increased promotional spending, our earnings were negatively affected by the incremental costs associated with these promotions, as well as continued gross profit pressures from inflation in certain categories.

"We also experienced higher medical expenses, a trend that is affecting our entire industry," Scott said. "We saw a weakening in consumer demand and in our operating performance in the second half of the quarter, a trend that has continued into our current quarter. Looking forward, we remain highly focused on driving our sales through effective marketing programs, controlling costs, and modernizing our stores through our renovation program. These strategies should position us to benefit when market conditions improve."

The company further noted that it's in the process of refinancing its credit agreement and that one of the lenders in its existing bank group has agreed to use its best efforts to arrange for commitments for a new $250 million credit facility, which would completely refinance its existing credit agreement. However, based on its lowered EBITDA guidance, the company said it was "probable" that it would be in violation of certain debt covenants at the close of the current quarter. Pathmark expects to close on the new credit facility in the next 30 days.

During a conference call yesterday, Scott remained determinedly optimistic about the company's future, saying, "I know we will take the necessary steps to move Pathmark's franchise forward." One topic raised during the call was nonfood shrink, which she described as "always . . . the most challenging department for us." To combat this problem, Pathmark has begun working on what Scott called the "No. 1" solution of inventory control.

She also spoke of the company's in-stock program, in which Pathmark is studying all the "touch points" in its supply chain, with the help of a task force composed of its wholesaler, trucking services, and others, to improve efficiencies. According to reports from mystery shoppers, the grocer is making very nice progress so far, according to Scott.

Pathmark's renovation program is now planning 18 remodels and two enlargements, noted Scott during the call, adding that the company is considering such concepts as an expanded prepared foods/deli department and a larger general merchandise selection, though which concepts were ultimately chosen depended greatly on store demographics.

Among other renovation ideas, Pathmark has already put 14 natural food/nutrition centers in its stores over the past 18 months or so, she said. Scott additionally mentioned the company's goal to upgrade its décor package, which she called "very, very vibrant in terms of a new look for our Pathmark stores."
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