A&P supermarket chain faces bankruptcy: computer woes cited as contributing to problems

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A&P faces bankruptcy

by Jaret Seiberg Posted 07:55 PM EST, Dec-11-2000

Supermarket chains Grand Union Co. and Pathmark Stores Inc. ended up in bankruptcy. Now The Great Atlantic & Pacific Tea Co. may be the next metropolitan-area grocer to bite the dust.

Once dominant, Montvale, N.J.-based A&P suspended its dividend last week, recently reported negative earnings per share after all costs and has seen its stock price fall nearly 80% in the past year. On Dec. 7, Moody’s Investors Service put 11 different types of A&P debt on review for possible downgrade.

Analysts said these are many of the same ailments that struck Grand Union and Pathmark, also based in New Jersey.

"A&P is poorly managed and has old assets," said Andrew Wolf, an analyst at BB&T Capital Markets in Richmond, Va., of the 750-store chain. "It won’t survive if they don’t get their act together."

There’s one other big similarity that A&P’s plight has with that of its Jersey rivals: Given its financial predicament, a takeover by another supermarket chain is unlikely.

In A&P’s case, an additional hurdle is that the Tengelmann family owns more than half the company. With a family member at the helm, several analysts said a merger is not in the cards. "This fact reduces its speculative appeal," Merrill Lynch & Co. analyst Mark Musson wrote in a research report.

A&P officials did not return calls for comment. A spokeswoman at an outside public relations firm used by A&P also declined to comment.

In recent reports, two analysts have blamed part of A&P’s troubles on the hyper-competitive greater New York market. The bankruptcies of Grand Union and Pathmark allowed those chains to significantly cut prices. Royal Ahold NV, the Dutch supermarket company, also ran numerous pricing specials as it rebranded its former Edward’s chain in the metro area as Stop & Shop Supermarket Co. outlets.

"In a further sign that competition is intensifying, A&P has discontinued its 10-cent quarterly dividend," Bear, Stearns & Co. analyst Deborah Weiswig said in her weekly sector roundup. "We suspect the move signifies the company’s ongoing struggle to compete against larger chains."

Ahold is buying 56 Grand Union stores, and Safeway Inc. last week announced its acquisition of privately held Genuardi’s Family Market, which has about $915 million in annual sales.

Moody’s vice president Elaine E. Francolino and senior vice president Linda Montag wrote that they put A&P on review because of worries about the impact of the "highly promotional competitive environment" on the company. "Moody’s review will focus on the company’s plans to bolster sales and margins in the face of intense competition," they wrote.

A&P’s interest expense increased 24% in the quarter ending Sept. 9, compared with a year earlier, according its most recent 10Q on file with the Securities and Exchange Commission. The company said its working capital dropped to $32 million, down from $98 million at the start of the fiscal year. A company that historically has carried little debt now has about $1 billion in long-term debt.

Merrill Lynch’s Musson said in a report Wednesday that the dividend cut will improve cash flow by freeing $15.3 million annually. Yet he still advised investors to avoid the shares, saying there is "tangible evidence" of a looming cash crunch.

The grocer’s woes are part of a long, downward trend for the firm that used to operate coast to coast. Started by George Gilman and George Hoffman in 1859 to sell discounted tea in New York, the company expanded to 15,900 grocery stores by the 1930s. The decline started in the 1950s when A&P refused to carry non-grocery items in its stores.

Years of mismanagement forced the chain to shut its California and Washington operations and focus on its Greater New York core. Efforts to restore the chain in the 1970s proved fruitless as the company failed to grow sufficiently. In 1979, the German-based Tengelmann Group assumed control. It began an acquisitions binge, buying six chains from 1982 to 1992, including SuperFresh, which operates in the Middle Atlantic states.

A&P’s inability to turn the corner to prosperity is evident in data provided by Moody’s. The company has detailed rating histories on eight securities, some dating back as far as 1972. None of the debt instruments has ever been upgraded by Moody’s–every one either has been downgraded or is under review for a downgrade.

A&P, now run by Christian Haub, a member of the Tengelmann family, has recognized the problems. He has recently launched a "Great Renewal" plan to close or sell old stores, renovate additional outlets and open more superstores.

So far, the plan isn’t working. Haub, the president and CEO, said in the company’s Oct. 2 earnings release that the new and acquired stores are not delivering the expected sales or profits.

BB&T’s Wolf praised A&P for realizing it needs newer and bigger stores, but he said the company has yet to prove it can make the new assets work.

He noted, for example, that A&P is spending millions of dollars on consultants from IBM Corp. and other firms to create computerized outsourcing system. The industry leaders, by contrast, developed these same systems internally for much less money, he said.

Most worrisome is the company’s poor Ebitda of $384 million on sales of $10.4 billion, which translates into an Ebitda to sales ratio of 3.2%. "That is awful," Wolf said. "For a company in urban areas with high costs, it needs to be at 8% to 10%."

The ratio is much worse than its major in-market rivals. Safeway’s ratio of Ebitda to sales is 7.74, while Royal Ahold’s is 5.98. Kroger Co., the country’s largest grocer, has a ratio of 6.35.

The market has been far less kind to A&P than to Ahold or Safeway. While A&P is down almost 80% in the past 52 weeks, Safeway’s stock is up 80%, and Ahold’s has risen 3.2%, though even that stock is up 47% since it hit its 52-week low Feb. 25. Kroger jumped 50% in the past 52 weeks.

A&P has a bit of time left to orchestrate its rescue. It is unlikely to suffer from a credit crunch in the next year. The company said in its 10Q that it still has $394 million left as part of a $499 million unsecured five year line of credit with a syndicate of banks. The credit line expires June 10, 2002.

The company also has successfully turned around its foundering Canadian operations and its Great Renewals initiatives are coming in on budget.

"We remain confident that our strategies will make A&P stronger and more profitable in the long-term," Haub said in the Oct. 2 earnings release.

Grand Union went bankrupt once before, emerged and then fell back into it.


-- Carl Jenkins (somewherepress@aol.com), December 12, 2000


This news does not surprise me. They kept building more and more superstores close to each other. This had to be expensive. They also probably started competing with themselves.

The Grand Union is not a surprise for much the same reasons (overbuilding new stores close to others in their chain).

-- K (infosurf@yahoo.com), December 12, 2000.

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