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Pathmark Posts Wider Loss for 3Q

CARTERET, N.J. -- Pathmark Stores, Inc., based here, reported a net loss of $18.3 million, or 36 cents per diluted share, in its third quarter of fiscal 2005 ended Oct. 29, vs. a net loss of $3.6 million, or 12 cents per diluted share, in the year-ago period. Pathmark attributed this decline to an $11.8 million decrease in adjusted EBITDA, a merchandising and store initiative charge of $4.2 million, a store labor buyout charge of $3.6 million, and a separation agreement charge of $1.6 million.

The company posted third-quarter sales of $980.5 million, a rise of 0.1 percent from $979.9 million in last year's third quarter. Same-store sales dipped 0.6 percent in the third quarter.

According to c.e.o. John Standley in a statement: "Pathmark made significant progress in the quarter by completing its initial merchandising and store initiative. In each of our 142 stores, we expanded our perishable selections; introduced new merchandise categories such as party goods, kitchen items, dollar merchandise, and toys; and improved the appearance of our stores both inside and out. While we are confident that our increased focus on perishables will be beneficial, significantly higher inventory shrink in the perishable departments impacted our quarter's results. We believe this shrink result is transitory and have taken steps to normalize it by the end of the current quarter. Additionally, we continue to evaluate and challenge all elements of our business to improve operating performance."

Adjusted EBITDA went from $31.4 million to $19.6 million in the third quarter, because of $4.9 million of incremental shrink as a result of the merchandising and store initiative, and about $6.0 million in higher expenses due mainly to rises in oil prices and medical and insurance expenses.

In a conference call yesterday, Standley attributed the higher shrink to new merchandising standards that required certain stores to display too much inventory compared to their sales, a learning curve for department managers in ordering and handling product, and some slow-selling items. He noted that standards had been adjusted, special training had been implemented and the products in question had been removed from itemization, all of which should bring shrink costs into line by the close of the fourth quarter, as previously mentioned.

Pathmark's chief executive also spoke in more detail about the merchandising and store initiative, which he characterized as "using excess space in the store more efficiently" through its elimination of clutter from too many shippers and product displays, and noted that the initiative had led to, among other things, an improvement in grocery performance and "better penetration down the aisles, [which is] beneficial for us."

He noted that more than 1,500 associates had been mobilized for the effort, which included four model stores, which served showcases for merchandising strategies and were visited by all managers. In addition, he said he was "encouraged" by the sequential improvement in sales in the third quarter compared with the second quarter. According to Standley, the ultimate aim of the initiative is to satisfy customers and grow sales gradually.

Standley and president, c.f.o., and treasurer Frank Vitrano also noted the completion of a voluntary union buyout taken by 150 eligible unionized employees, based on seniority and hourly rate requirements, which will result in $4 million in annualized savings, starting this quarter.

Capital investments in the first nine months of fiscal 2005 came to $43.8 million. During the first nine months of fiscal 2005, Pathmark opened one new store, closed two, and renovated six. The new store was a replacement for one of the closed stores. For the rest of fiscal 2005, the company intends to open one new store and finish two store renovations. Total capital investments for fiscal 2005 are projected to be about $70 million, including $8.5 million from the merchandising. For the fourth quarter, Vitrano said that the company planned to open one new store and complete renovations on two stores. Renovated stores normally experience a 10 percent lift in sales, according to the company.

Standley noted that Pathmark's goals for the near future included fine-tuning the execution of the merchandising and store initiative and reviewing cost structure, while working to further improve the company.

In response to analysts' questions, Standley said IT systems would be enhanced over the next six to 12 months and that the company was looking "pretty carefully" at ways to grow its private label business, which it saw as a "great opportunity."

Pathmark is a regional supermarket operating primarily in the New York-New Jersey and Philadelphia metropolitan areas.
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