MONTVALE, N.J. — Sales are moving again at Pathmark, but they're coming at a cost.
Issues related to a change in how Pathmark made forward buys, as well as a lag between accepting price increases and passing them along to shoppers, dragged margins down at Pathmark and contributed to a $17.4 million quarterly loss for parent A&P here, the retailer said last week.
EBITDA of $67.1 million, and a loss per share of $1.75 for the second quarter, which ended Sept. 6, were below analyst estimates but represented an improvement from the same period a year ago, when A&P lost $91.3 million, or $2.18 per share. Sales, reflecting the newly acquired Pathmark stores, increased 69.2% to $2.2 billion for the quarter, with comparable-store sales up 2.8%.
Out-of-stock conditions caused by changes in processes at Pathmark stores — and an inability to recognize those conditions quickly — contributed to declining profits, A&P officials said. Those issues arose while A&P was introducing a more aggressive “price impact” format that helped the Pathmark division turn comparable sales increases of 2.9% during the quarter.
Speaking to analysts in a conference call last week, Eric Claus, chief executive officer, identified several issues affecting performance at Pathmark during the quarter: He said the company waited too long to raise shelf prices; failed to smoothly shift forward-buying responsibilities from the stores to the central offices; and suffered out-of-stock positions in private-label and ad merchandise, which were exacerbated by a consumer base that presented a bigger demand for those items.
All of those issues were addressed late in the quarter, Claus said, although he said it might be a few weeks before they all are resolved. He characterized the issues as stemming mainly from a failure to communicate responsibility for various functions under the new central structure.
“It wasn't the integration, per se — but it's when you marry the people and the processes in, things get lost,” Claus said. “I think we set up our organization charts in a manner that didn't allow for certain responsibilities to one individual. They were shared. It was like, ‘Oh, I didn't do it if you didn't do it.’
“Chalk this one up to, ‘We could have done a better job in how we set this up in terms of people and process,” he added.
Brenda Galgano, chief financial officer, said the change in forward-buying processes cost A&P around $12 million in EBITDA, with the lag in passing along higher prices costing $5 million and out-of-stocks costing A&P $3 million. Those costs were separate from a merchandising-related issue at Pathmark that cost the company $5 million during the first quarter.
Karen Short, an analyst at Friedman, Billings, Ramsey and Co., New York, in a research note last week said she was optimistic A&P had overcome its Pathmark integration issues and could focus on improving results in the second half of the year, citing positive trends at its fresh and gourmet stores, as well as progress toward achieving synergy savings in connection with the Pathmark acquisition.
“The execution blips are not excusable, in our opinion, but the damage is done,” Short said.
In other matters addressed by A&P last week:
Gourmet stores under the Food Emporium banner have been performing strongly, with the division showing a 61% improvement in EBITDA over last year. Claus noted that these stores, located in Manhattan, might be benefiting from Wall Street turmoil, with less travel and less dining in restaurants.
A&P's stock has been “very much oversold,” according to Christian Haub, A&P's executive chairman, who attributed its recent decline in part to investors short-selling the stock and forced liquidations of hedge funds (see sidebar). Haub said that more than one-third of the float had been shorted during the quarter.
Also as a result of financial uncertainty, A&P is reducing its annual capital-spending budget to a range of $100 million to $125 million, down from earlier projections of $200 million. This accompanies a shift of projects toward the most cost-effective renovations of price-impact Pathmark and discount Food Basics store renovations, as opposed to fresh-store conversions.