Pathmark's Struggles Sink A&P

MONTVALE, N.J. — Count Pathmark among the unexpected victims of the recession. The newly integrated division of A&P saw sales, profits and traffic plummet in the fiscal fourth quarter, sending A&P to a $111.1 million loss and subsequent analyst downgrades and a vigorous stock sell-off. Officials last week acknowledged Pathmark despite having a good reputation for value had let prices drift too high,

MONTVALE, N.J. — Count Pathmark among the unexpected victims of the recession.

The newly integrated division of A&P saw sales, profits and traffic plummet in the fiscal fourth quarter, sending A&P to a $111.1 million loss and subsequent analyst downgrades and a vigorous stock sell-off.

Officials last week acknowledged Pathmark — despite having a good reputation for value — had let prices drift too high, and then acted too deliberately to reposition the banner as the recession drove shoppers to seek retailers with sharper pricing. And though they pledged attention toward reestablishing Pathmark as a high-volume, price-focused operator, they said the job would take some time.

“The reason Pathmark went so rapidly off the rails in terms of sales is that with this economic situation, you can't live on perception anymore,” Eric Claus, chief executive officer of A&P, told analysts in a conference call last week. “You have to live in reality. In these times, people gravitate toward the price leader, and that hurt us.”

A&P closed on its acquisition of Pathmark 15 months ago and recently completed its integration, deriving $150 million in synergies. But it has encountered numerous troubles along the way, including what analysts estimated as quarterly comparable-store sales declines of 3% or more, and EBITDA declines of as much as 50% at Pathmark.

Pathmark's weakness was evident mainly in New Jersey, Pennsylvania and Delaware, which points to ineffective competition against price leader ShopRite and, probably, lost share to Ahold's Giant and Stop & Shop chains. The Ahold chains have attributed recent comp gains to a lower-price message achieved through a transformation from high-low to everyday-low pricing in recent years.

“We believe that the Pathmark banner has been outmaneuvered by some competitors,” John Heinbockel, an analyst for Goldman Sachs, said last week in a research note. “A 3% comp decline, even in this environment, represents clear share loss.”

Pathmark, said Claus, has been pursuing its own repositioning as the “price impact” entry in A&P's stratified portfolio, but acknowledged the gradual approach it took to that end was no match for the swift kick that the economy brought to those markets during the fourth quarter, which ended Feb. 28. Those trends, he added, continued into the current quarter. Pathmark comprises 45% of A&P's revenues.

Pathmark further hurt itself by pulling back advertising. “Pathmark has a history of doing a lot of radio and TV, and I don't think we did ourselves a big favor by turning it off,” Claus admitted. “But we didn't want to shout about something we couldn't deliver.”

Claus said the company since the fourth quarter has fast-tracked changes it planned to have done more gradually and has again begun supporting the new positioning with advertising. A slate of former SuperFresh locations in the Philadelphia region converted this spring to the Pathmark banner have also performed admirably, he added.

But Pathmark also suffers from structural issues, including high warehousing and transportation costs, low labor productivity and high shrink that will take longer to address, he cautioned.

Analysts believe that A&P can fix the problems, citing Claus' success with other A&P banners — all of which performed relatively well during the fourth quarter. But it will take time.

“The impact from new merchandising initiatives, structural price investments, stepped-up advertising to bring traffic back to the stores and intense management focus should help stabilize the top line in the near term,” Simeon Gutman, an analyst for Canaccord Adams, said in a research note.

Q4 RESULTS

Qtr Ended 2/28/09 2/23/08
Sales $2.3B $2.2B
Change +4.5%
Comp-store -1.3%
Net Income (Loss) ($111.1M) ($61.5M)
Change N/A
Inc. (Loss)/Share ($4.15) ($1.73)
Fiscal Year 2009 2008
Sales $9.5B $6.4B
Change +48.4%
Net Income (Loss) ($139.9M) ($160.7M)
Change N/A
Inc. (Loss) /Share ($5.41) ($4.22)
NOTES: 2009 WAS A 13-WEEK FOURTH QUARTER AND 53-WEEK FISCAL YEAR VS. A 12-WEEK QUARTER AND 52-WEEK FISCAL YEAR IN 2008. ALSO, FISCAL 2008 DID NOT INCLUDE A FULL YEAR OF RESULTS FROM THE PATHMARK ACQUISITION.