A&P posts big jump in profits from ongoing operations

Chain Drug Review, Feb 4, 2008

MONTVALE, N.J. -- Buoyed by a gain on the sale of its remaining interest in Canada's Metro Inc., A&P saw income from ongoing lines more than double during the third quarter of fiscal 2007. Factoring out various special items in both years, the company narrowed its adjusted operating loss from ongoing Northeast operations and posted a solid increase in adjusted EBITDA.

After-tax earnings from continuing operations vaulted 126.6% to $73.1 million during the 12 weeks ended December 1 from $32.3 million in the preceding year. Factoring in $15.8 million in losses from discontinued operations, versus income of $8.45 million a year ago, net income climbed 40.8% to $57.3 million from $40.7 million.

Third quarter sales rose 3.1% to $1.25 billion from $1.21 billion, with comparable-store results gaining at that same pace. Results for the most recent period do not include food/ drug combo operator Pathmark Stores, which was acquired at the onset of the fourth quarter (see accompanying story).

Backing out items the company considers nonoperating in nature (restructuring costs, expenses associated with the Pathmark acquisition, gains and losses from real estate activity, and income from an information technology services agreement with Metro), A&P pared its adjusted operating loss from ongoing lines to $12.1 million in the fiscal 2007 quarter from $17.7 million a year ago. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, the aforementioned items, the gain on the Metro sale, and other items) improved 26% to $20.5 million, or 1.6% of sales.

Taking into account the impact of a number of those special items, store operating, general and administrative (SOGA) expenses jumped 77 basis points to 32.2%. Concurrently, gross margin for the quarter dropped 45 basis points to 30.51%. With that, A&P's reported operating loss widened to $21.1 million from $5.7 million in 2006.

But the operating loss was set aside by, among other things, the $106.1 million gain on the sale of the Metro stake, a 5.2% decline in interest expense to $14.5 million, and a 130.4% jump in interest income to $3.91 million. This paved the way for A&P to post pretax income from ongoing lines of $74.8 million in the fiscal 2007 quarter, reversing a loss of $8.92 million a year ago--which was cushioned by $11.0 million in equity earnings from Metro.

Over the 40 weeks, meanwhile, after-tax earnings from continuing operations surged more than fivefold to $131.5 million from $23.7 million in the fiscal 2007 span. But after including losses from discontinued operations totaling $230.7 million, A&P sustained a $99.2 million net loss for the year to date, in contrast to income of $34.1 million in the preceding year, which included $10.3 million in earnings from discontinued lines. Nine-month sales increased 2.5% to $4.2 billion from $4.1 billion, stoked by a 2.3% comparable-store gain.

Excluding those items, the adjusted operating loss from ongoing lines for the 40 weeks was cut to $26.8 million from $34.6 million in the 2006 span. Adjusted EBITDA grew 10.8% to $87.2 million, or 2.1% of sales.

Assessing the results, executive chairman Christian Haub said in a statement: "A&P's transformation and operating improvement moved forward, driven by ongoing strategic and business strategies in the third quarter, highlighted by another solid sales performance, the completion of our noncore business divestitures and, just after the quarter closed, our acquisition of Pathmark Stores Inc.

"With operations focused exclusively in the Northeast, and the addition of Pathmark establishing our market leadership in metropolitan New York and improving our Mid-Atlantic presence, our strategic transformation is now completed, and our comprehensive plan for the integration of the Pathmark business is well under way."

Elaborating on the results of the ongoing operations, Haub commented: "Our steady focus on key strategic initiatives in operations, merchandising, store format development and cost management continues to produce traction during this quarter, as evidenced by our ongoing strong sales momentum, only slightly lower gross margins despite our aggressive pricing and promotional approach, lower costs through strict internal controls and increasing sales leverage, improved operating income, and finally our tenth consecutive quarter of year-over-year improved results."

In the ongoing operations, adjusted SG&A expenses actually declined 59 basis points during the quarter, helping to counter a 12-basis-point dip in gross margin, chief financial officer Brenda Galgano advised analysts.

At quarter's end A&P operated 322 stores in eight states and the District of Columbia, down from 410 a year ago. The subsequent addition of Pathmark lifted its current store count to 455 units.