A&P earnings disappoint, but company confident on debt

By Paul Deckelman

New York, Jan. 7 - The Great Atlantic & Pacific Tea Co. Inc. turned in disappointing fiscal third-quarter results as its net loss tripled from year-ago levels. However, executives of the Montvale, N.J.-based supermarket company were able to point to a "significant" year-over-year gain in EBITDA, said the operator of the venerable A&P chain continues to make progress in turning itself around, and expressed confidence that it would be able to refinance upcoming debt maturities.

"We remained unprofitable overall in the third quarter and, along with our supermarket competition and many other retail sectors, we were unable to grow sales significantly in the difficult retail environment in most of our U.S. markets," Christian W.E. Haub, the company's chairman and chief executive officer, told analysts on a lengthy late-morning conference call following the release of the numbers.

In the fiscal third quarter ended Dec. 4, A&P lost $75.343 million ($1.96 per share), versus $25.267 million (66 cents per share) a year earlier. Wall Street had been expecting a loss of $1.19 per share.

However, the news was not all bad. Total sales grow slightly to $2.543 billion from $2.484 billion a year earlier. Company earnings were buoyed by the profits from its Canadian division, while back in the United States - even amid a soft and soggy retail market - the company did not lose market share to its competitors. EBITDA was $48 million versus $42 million a year ago, an improvement over the EBITDA rate for the second quarter, and the second consecutive quarter of year-over-year improvement.

Haub also noted that the "fresh market" strategy that A&P hopes to use to increase fresh-food sales at its eponymous flagship chain in the United States and Canada, as well as such other company subsidiaries as the Waldbaum's and Food Emporium chains in metropolitan New York, Super Fresh in the Mid-Atlantic states, Farmer Jack in the Midwest, Sav-A-Center down South and Dominion in Canada, continued to develop during the quarter. And the company - 57% owned by German retailer Tengelmann Warenhandelsgesellschaft KG - "initiated the next phase of our turnaround and rebuilding effort, with major changes in the structure and scope of our U.S. organization."

Haub acknowledged that "no unprofitable quarter is a successful one," while adding that "we did make additional progress behind major initiatives driving the turnaround of our U.S. business, and the profitable growth of A&P Canada."

However, he cautioned, "we remain conservative in light of leading economic indicators that show few signs of significant improvement - suggesting that consumer spending is likely to remain cautious."

Looking at refinancing alternatives

The company's chief financial officer, Mitchell P. Goldstein, said in answer to an analyst's question about the company's 7¾% notes scheduled to mature on Apr. 15, 2007 - and the fact that the company's bankers want the funding to repay those notes in place six months earlier, in mid-October of 2006 - that "we have a range of different options" available.

He said that the "traditional option would be that we would go out in the market and do a high-yield financing, at a time of our choosing."

The CFO noted that the junk bond market "is very strong right now, and we believe that if we were to want to do an offering right now, the market would probably be available."

However, he said that A&P hasn't tried to line up such funding, and was also looking at different alternatives.

For instance, he continued, there are secondary lien or B-loan-type facilities - and apparently, no shortage of potential providers, even given A&P's spotty debt rating - Moody's Investors Service rates the company's senior debt at Caa1 and it gets a B- from Standard & Poor's, with negative implications from both agencies.

"We've had, I would say, a fair number of approaches from people with very credible offers that could conceivably help us refinance the '07s," Goldstein said. "I feel pretty confident now that barring a catastrophe, that we'll be able to refinance those bonds when we choose."

He said that when the company does its planning for fiscal 2005, "depending on the mix of activities and plans that we have, that's when we'll choose when to approach that market. But I certainly think that by October '06, we should have that well taken care of."

In answer to another query, Goldstein and Haub said that A&P does not contemplate having to turn to Tengelmann for any financial assistance.

Debt up $96 million

Goldstein said that the company ended the quarter with $896 million of net debt, including capital leases and financing associated with recent sale-leaseback transactions on some formerly company-owned locations, but net of $26 million of short-term investments that A&P had at the quarter's end.

He noted that net debt had increased during the quarter by $96 million, which he attributed to "normal seasonal factors as we built inventory in anticipation of the holiday season." He said the debt figures also included $12 million associated with the sale and leaseback of four New Orleans stores acquired earlier in 2004, offset by bond repurchases - A&P bought back $6 million of the 7¾% notes on the open market, resulting in an $800,000 pretax gain due to the early extinguishment of debt.

"The increase in net debt represents utilization of our temporary cash investments, and not additional borrowings," Goldstein declared.

As of the end of the third quarter, the company's debt picture included $631 million of outstanding junk bonds -$214 million of the 7¾% notes, $217 million of 9 1/8% senior notes due 2011 and $200 million of 9 3/8% notes due 2039. It also had in place a $400 million secured revolving credit agreement, although there were no borrowings extant on the facility at quarter's end. However, borrowing availability under this facility was reduced to $241.2 million by outstanding letters of credit and borrowing base requirements.

Interest expense was $19.2 million, up from $18.4 million a year earlier, primarily due to higher interest expense resulting from A&P's on-balance sheet financing obligations connected with the sale and leaseback of company-owned properties entered into in the fourth quarter, totaling some $4.1 million. This impact was partially offset by lower interest from lower borrowings of about $3.3 million.

Liquidity "good"

The CFO said that including $135 million of letters of credit supported through the revolver, A&P had a total of $1.031 billion of funded net debt at the quarter's end. Its $241 million of revolver availability, plus the $26 million of short-term investments on hand, gave the company total availability of $267 million. While that was down from the $350 million with which it began the quarter back in early September, the company expects the short-term investment component to increase during the current fourth quarter due to seasonal factors.

Goldstein said that with the actual net debt (not counting the letters of credit) of $896 million, and last 12 month EBITDA, adjusted for non-operating costs, of $211 million, the company's debt/EBITDA leverage ratio at the end of the quarter stood at 4.25 times.

"From my standpoint, our liquidity remains good," he opined. "As we work through our planning for the coming year, we are fully aware of the importance of maintaining strong liquidity, and we are very focused - as always, on cash flow. I am confident that we can continue to operate at the levels we are at for some time, and that the right decisions, and levers, remain our control."

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