ANALYSTS VIEW A&P CHANGES POSITIVE TO TURNAROUND

MONTVALE, N.J. -- While the recent executive promotions and restructuring at A&P indicate a vote of confidence in its ongoing turnaround effort, they also signal the gravity of its financial situation, analysts told SN.A&P, based here, has unveiled a series of senior appointments combining its corporate and U.S. operating management in a unified structure. Under the new arrangement, the former U.S.

MONTVALE, N.J. -- While the recent executive promotions and restructuring at A&P indicate a vote of confidence in its ongoing turnaround effort, they also signal the gravity of its financial situation, analysts told SN.

A&P, based here, has unveiled a series of senior appointments combining its corporate and U.S. operating management in a unified structure. Under the new arrangement, the former U.S. division president, Brian Piwek, was named president and chief operating officer of the entire company, and Mitchell P. Goldstein was promoted from chief financial officer to executive vice president. Piwek and Goldstein, along with Eric Claus, president and chief executive officer of A&P Canada, and John Metzger, the newly named senior vice president and chief information officer, will make up the executive committee reporting to Christian Haub, A&P's president and CEO.

In a memo sent to employees that was obtained by SN, Haub said the changes, which take effect today, "will focus the development of our fresh and discount strategies in an effective manner." SN's calls to A&P requesting further comment were not returned last week.

Karen Miller, managing director of high-yield research for Bear Stearns, New York, said the promotion of Goldstein is significant because it indicates A&P will consider financial strategies as a larger part of its overall business plan going forward. These considerations might include sale-leaseback transactions or asset sales as A&P works to overcome its cash burn rate, which Miller estimated at $100 million a year.

"I think that making the CFO an EVP demonstrates that the chairman recognizes the strategic importance of finance in the overall business plan," Miller said. "I think finance typically had a side role at A&P, but I think it will take a more important role in strategic business decisions now. Asset sales and sale-leasebacks could play a more important role in the overall plan."

Goldstein in an earnings conference call last month said A&P had no immediate plans to sell off divisions, adding that the progress A&P has made operating its stores offers its best, current financial opportunity. "If a value creation opportunity presented itself that was far better than operating the business, we would of course consider it," Goldstein said. "But to simply shut down at this point would really be self-defeating. It would cost us value and take away from the progress."

Analysts noted, however, that A&P could unlock value by selling and leasing back its owned real estate or by selling its profitable Canadian division. According to Miller, such strategies will likely come into play as A&P faces mounting debt and losses while plans to rekindle sales at U.S. stores take hold. "You could characterize that U.S. operations have stabilized since last year, but they were still weak," she said. "There's only 25 Food Basics in the U.S., and the concept still has to be proven. That's not going to happen overnight."

Bryan Hunt, vice president of fixed income for Wachovia Securities, Charlotte, N.C., said in a research note that A&P's owned real estate (84 properties, including eight shopping centers, seven warehouses and 31 offices) has a market value "well above $600 million" based on recent sale-leaseback deals. A sale of the Canadian operations, he added, could generate more than $700 million. A&P carries bond debt of $636 million.

"What's supporting the price of the bonds to some extent is the thinking that the Canadian assets are valuable. At some point, they may sell the Canadian assets," added Miller.

David Moura, senior analyst for First Albany Capital, New York, told SN he feels Goldstein will take the right steps to ensure a healthy balance sheet, maintain liquidity, and get a return on the investments A&P is making to improve its U.S. business. Goldstein was instrumental in raising the capital for A&P's current spending plans through asset sales, including the Eight O'Clock Coffee business.

"I think Wall Street is getting more confident that A&P is going to be a good steward of its balance sheet," he said. "If Christian [Haub] can turn around the U.S. operations, and I think he ultimately will, they're going to create a tremendous amount of value for themselves."

Moura said he doesn't anticipate A&P would sell its Canada operations in the near term, but said "if they got into a situation where they needed liquidity to support the rebuilding of the U.S. operations, it's clearly an option." Canadian supermarket operators like Sobey's and Metro, he added, "would love to own the A&P Canadian assets."

The company in the meantime is focused on turning around its fortunes in the United States and returning the company to profitability. Key to the effort is a two-tiered strategy whereby A&P will position new stores and existing stores as either the Food Basics discount model or the upgraded Fresh Market concept. "Going forward, all of our store development will reflect one of these two strategies," Haub said in the memo.

Piwek, who is credited with leading the turnaround of A&P's fortunes in Ontario, also directed the initial phase of the U.S. turnaround plan. That effort includes around 25 Food Basics discount stores and four A&P stores that have been redeveloped into a new "Fresh Market" concept. Haub, in a recent conference call, described those stores as "a comprehensive concept evolution" that includes a wider selection of natural/organic, prepared and perishable foods, enhanced customer service, and a new pricing structure in the store to drive profits.

"Brian Piwek has an excellent reputation among the trade, so I consider it a positive," Gary Giblen, director of research for C L King & Associates, New York, told SN. "[His promotion] adds a needed chief operating officer, rather than having the company run by each division."

A&P will continue spending behind its effort. Hunt estimated the company will spend between $200 million and $225 million through the end of its fiscal year in February, covering remodeling at 75 stores, as many as 10 new stores, and between 10 and 20 banner conversions.