GRAND UNION CO. HOPING FOR 5.5% MARGINS

WAYNE, N.J. -- Grand Union Co. here hopes to achieve operating cash flow margins of 5.5% by this year's fourth quarter and 6% by the end of fiscal 1999, J. Wayne Harris, chairman and chief executive officer, said last week.In reporting financial results for the second quarter ended Oct. 11, the company said operating cash flow margins -- earnings before interest, depreciation, amortization and last-in,

WAYNE, N.J. -- Grand Union Co. here hopes to achieve operating cash flow margins of 5.5% by this year's fourth quarter and 6% by the end of fiscal 1999, J. Wayne Harris, chairman and chief executive officer, said last week.

In reporting financial results for the second quarter ended Oct. 11, the company said operating cash flow margins -- earnings before interest, depreciation, amortization and last-in, first-out provisions -- were 2.7% for the quarter and 1.9% for the first half.

Harris said his optimistic expectations for a dramatic turnaround in earnings are based on results achieved in the chain's Southern division stores late in the second quarter and during the first few weeks of the third, involving reductions in store labor costs, wrapping supply costs and advertising expenses, plus a more consistent marketing approach and more deal merchandise -- initiatives that resulted in a sales increase of 1% in the second quarter.

Bob Lupo, a high-yield securities analyst with BA Securities, Chicago, said he is doubtful the company can raise EBITDA margins so dramatically in such a short time. "Going from 2.7% margins in the second quarter to 5.5% by the fourth would represent almost 300 basis points, which is an unheard-of growth rate. And the New York marketing area is very competitive and very price-intensive, and Grand Union lags behind some other chains in a number of attributes, including the quality of its store base, customer service and pricing."

Grand Union said sales fell 2.7% to $518.9 million for the 12-week second quarter and 2.6% to $1.2 billion for the 28-week first half, while comparable-store sales fell 1.6% for the quarter and 1.7% for the half.

EBITDA were down 54.9% to $13.8 million, or 2.7% of sales, compared with $30.6 million a year ago; for the half, EBITDA fell 66.9% to $23.8 million, or 1.9% of sales, compared with $72 million a year ago.

Harris said he anticipates EBITDA can rise significantly in a relatively short time if Grand Union can continue the improvements it saw in its Southern division stores -- the 99 units in metropolitan New York, New Jersey, Connecticut and Pennsylvania.

"What we did in the Southern division is put together a very basic plan, one we believe we can maintain from week to week, in which we're giving customers things they like -- not reinventing the wheel or selling way below cost but providing a consistent program of values to customers," he explained.

Similar programs will be introduced in the next few weeks in the chain's 125 Northern division stores -- in upstate New York, Vermont and New Hampshire, Harris noted, "and as we install these initiatives in the Northern division, our objective is not to start a price war but to price carefully, with the skill of a surgeon, to attract customers to what we're offering without upsetting the marketplace."