Tops Q1 Inside, Net Sales Up, Comps Down as Net Loss Widens

Tops Holding II Corp., the indirect parent of Tops Markets LLC, reported for the first quarter of the company’s fiscal 2017 ended April 22 incremental inside sales from nine acquired and new supermarkets of $44.3 million, a 3.1 percent rise from the year-ago period, while net sales were up 3.8 percent. Same-store sales declined 3.4 percent, however, because of food cost deflation in such categories as meat, as well as lower traffic and less federal funding for the Supplemental Nutritional Assistance Program (SNAP).

According to the company, fuel sales rose mainly as a result of a 23.2 percent increase in the average retail price per gallon, net of applicable discounts, although partly offset by a 5 percent decrease in gallons sold, due to a gas points promotion program during the 2016 period that wasn’t repeated in the 2017 period. At the end of the quarter, Tops was operating 52 corporate fuel stations.

“Our first quarter certainly had its challenges and mirrored industrywide trends,” noted Frank Curci, chairman and CEO of Williamsville, N.Y.-based Tops. “We were encouraged, however, as the bulk of the challenges hit during the beginning of the period. As we progressed through the quarter, we saw an improved trend in sales and profitability. Taking a closer look, we are seeing significantly improved performance in the six-store group that we acquired in August 2016, as promotional programs are taking hold and we better leverage our labor. Importantly, these combined locations contributed positively to our bottom line by the end of the quarter.”

Continued Curci: “Looking forward, we are finally starting to see some food cost deflation relief as certain categories are beginning to stabilize. We are also ramping up promotions in the second quarter as we look to drive top-line growth while continuing to balance our margin profile.”

The company attributed the 80 basis-point decrease in its gross profit margin to a shift in product mix given the larger proportion of relatively lower-margin fuel sales and a $0.7 million increase in noncash LIFO inventory valuation expense. Excluding the impact of LIFO adjustments and before distribution costs, gross profit margin on inside sales was relatively flat on a same-store basis, with an overall 20 basis-point decline due to higher promotional activity in connection to recent new store additions.

Also adversely affecting Q1 results, according to Tops, was an increase in distribution costs because of a $1.1 million increase in self-insured workers’ compensation claims expense due to adverse warehouse claims activity, and a $0.5 million rise in health and welfare expense.

Total operating expenses for the quarter came to $213.8 million, up $9 million, and, as a percentage of net sales, rose 20 basis points to 28.9 percent. Wages, salaries and benefits were up $8 million mainly because of Tops’ new stores, an increase in the New York State minimum wage rate from $9 to $9.70, and the increase in pension and health and welfare costs.

As a result, the company’s net loss was $22.8 million, compared with $15.2 million during the first quarter of 2016, the company noted.

Tops’ Q1 2017 EBITDA was $26.4 million, versus $33.9 million in the year-ago period. Adjusted EBITDA, excluding specified noncash and items not indicative of the company’s core operating performance, was $30.9 million, down $6.3 million from last year.

The grocer’s capital expenditures were $8.5 million in the first quarter and were largely related to store remodels and maintenance activities. Tops said it expects to invest $20 million to $25 million in cap ex during fiscal 2017.

Williamsville, N.Y.-based Tops operates 172 supermarkets including 171 under the Tops banner and one under the Orchard Fresh banner, with another five supermarkets operated by franchisees under the Tops banner. The grocer employs about 14,400 associates in upstate New York, northern Pennsylvania, western Vermont and north central Massachusetts.

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