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Executives

William J. Moss – Vice President and Treasurer

Christian W.E. Haub - Executive Chairman of the Board

Brenda M. Galgano - Chief Financial Officer and Senior Vice President

Eric Claus – President and Chief Executive Officer

Analysts

John Heinbockel – Goldman Sachs

Karen Howland – Barclays Capital

Karen Short – Friedman, Billings, Ramsay & Co.

Robert Summers – Pali Capital

The Great Atlantic & Pacific Tea Company, Inc. (GAP) F3Q08 Earnings Call January 8, 2009 11:00 AM ET

Operator

Good morning and welcome to The Great Atlantic & Pacific Tea Company’s conference call. All lines will be in a listen-only mode until the question-and-answer session. (Operator Instructions)

Chairing today’s call will be Christian Haub, Executive Chairman. Also participating on today’s call will be Eric Claus, President and Chief Executive Officer and Brenda Galgano, Senior Vice President and Chief Financial Officer.

I would now like to introduce Mr. Bill Moss, Vice President and Treasurer, who will read today’s A&P’s Safe Harbor disclaimer.

William Moss

Good afternoon everyone. This morning’s presentation may contain forward-looking statements about the future performance of the company and is based on management’s assumptions and beliefs in light of information currently available. The company assumes no obligation to update this information.

These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements including, but not limited to, competitive practices and pricing in the food industry generally and particularly in the company’s principal markets, the company’s relationships with its employees, the terms of future collective bargaining agreements, the cost and other effects of lawsuits and administrative proceedings, the nature and extent of continued consolidation in the food industry, changes in the financial markets which may affect the company’s cost of capital or the ability to access capital, supplier quality control problems with the company’s vendors and changes in economic conditions which may affect the buying patterns of the company’s customers.

I will now turn the call over to our Executive Chairman, Christian Haub.

Christian Haub

Good morning. Happy New Year and welcome to our third quarter conference call. As you know Brenda and Eric are with me and you will hear from them shortly.

The key themes emerging from our third quarter are the following: Our core A&P business is making solid top and bottom line progress. The integration of Pathmark has been completed and our synergy realization remains on track. We have successfully addressed the transition issues at Pathmark and the business is improving but is not yet performing at the level it is capable of.

The economic and competitive environment remains quite challenging and we are adapting our going to market strategy to meet the changing demands of our customers and we are all well prepared to deal with the difficult economic environment.

Let me go into a little bit more detail on these different themes.

Our core A&P business performed really well in our third quarter. We made very good progress in our core A&P business during the quarter especially considering the difficult consumer environment we are operating in. The format strategy we have been pursuing in the last three plus years continues to succeed in our Northeast markets and we are continuing to gain share.

The integration of Pathmark is completed and synergy realization remains on track. As of today the integration of Pathmark is virtually complete. One year after we closed the transaction we have now fully integrated Pathmark into our company. A year after closing the acquisition the strategic rationale for the deal remains intact. I can’t imagine where we would be without having Pathmark in our fold.

In the first 12 months of owning Pathmark we have now generated close to $85 million in synergies. At the end of our third quarter our run rate of synergies was approximately $140 million which virtually ensures we will achieve our original target of $150 million in synergies. From that perspective the acquisition was a big success and I want to thank the entire team for all their efforts in realizing these results.

We have successfully addressed the transition issues at Pathmark. As we noted during our second quarter call we experienced some challenges with the Pathmark business which negatively affected our overall bottom line results. I am pleased to report we have made very good progress addressing the issues and Pathmark’s bottom line improved sequentially. Eric will share more details during his presentation on this subject.

Turning to the tougher operating environment, 2008 has undoubtedly been a very turbulent year. The unprecedented challenging economic environment has resulted in the near collapse of the financial markets and has led to a severe global recession. While we are fortunate to be in the food business we are not immune to the challenges of this recession especially with unemployment rising in our markets. We have definitely noticed that consumers are changing their shopping behavior. Customers are reducing the number of items they buy on a regular basis but they are also changing the kind of items they buy. They are seeking value alternatives more aggressively than ever before.

From my perspective the trading down effect is now in full swing. Another factor impacting our business remains inflation. While it appears that cost increases may have peaked in recent months and we expect to actually experience some deflation in certain categories in 2009 as declining demand, falling commodity prices and lower energy costs will bring down the cost of many products. This will probably pressure our gross revenue dollars in the short-term but the benefit to gross margins should enable us to compensate that effect in the longer term.

Clearly the U.S. retail market is facing one of the most difficult and challenging years in 2009. This morning’s news certainly confirmed that consumers have dramatically cut back their spending. Considering this difficult backdrop I am quite encouraged by our current performance and believe that our company is well prepared for the challenges ahead.

We have shifted the strategy to meet the changing demands of our customers. Our comprehensive new private label program is playing a major role in this strategy as well as our ability to convert stores to our Price Impact and Discount formats which we believe will fare better during the economic downturn.

Overall I am staying positive on the outlook for the remainder of fiscal 2008 and expect our performance will continue to improve in fiscal 2009. We remain committed to generating positive cash flow in the fourth quarter of this fiscal year and going forward next year to begin to reduce our leverage.

As we approach the new fiscal year in 2009 and we celebrate our historic 150th anniversary I remain confident in the longer term prospects of A&P as our strong strategic position in the Northeast, our successful format strategy and our resolve to implement strategic changes positions us to effectively navigate through the economic storm and to emerge as a stronger competitor once the economy recovers.

With that I’ll turn it over to Brenda.

Brenda Galgano

This morning we reported third quarter sales of $2.1 billion and a loss from continuing operations of $3 million. Comparable store sales were positive 1.9% in the quarter excluding Pathmark stores. Comparable store sales for Pathmark were negative 0.5%.

Excluding non-operating items of approximately $5.5 million, ongoing EBITDA was $78 million this year which includes $30 million of integration synergies. Excluding $1 million for FTC store divestitures, third quarter 2007 EBITDA for A&P and Pathmark was $45 million on a comparable basis. Schedules three and four of our press release detail the non-operating items for both years.

The $30 million of synergies is comprised of $18 million of admin cost reductions, $7 million of cost of goods sold savings and $5 million of store operating cost savings. At the end of the quarter our annual synergy run rate was approximately $140 million.

Third quarter ongoing gross margin excluding a LIFO provision of $1.3 million increased 59 basis points to 31.2% for the quarter. For the A&P business, gross margins increased significantly driven by the realization of lower net cost from buying synergies, improved stock loss rebuild and overall improved margins especially in the fresh departments.

Margins for Pathmark began to recover from the second quarter levels. We have experienced significant improvement in our gross margin rate with the exception of stock losses in our center store. Third quarter adjusted SG&A decreased by 111 basis points from 31.48% to 30.37% driven primarily by the acquisition of Pathmark which contributed higher sales productivity.

Non-cash stock compensation expense for the third quarter was $1 million this year versus $2 million last year. Capital spending totaled $26 million including $3 million of integration capital. Depreciation expense was $61 million. This compares to $19 million of capital expenditure during last year’s third quarter with depreciation of $33 million.

During the quarter we completed the conversion of seven Super Fresh stores to the Pathmark Price Impact format in the Philadelphia market and converted one Food Emporium store to A&P Fresh. We expect fourth quarter capEx spend to be approximately $30 million.

We are in the process of finalizing our capital plan for fiscal 2009. Preliminarily we are planning on capital spending in the $130 million range.

Turning to our balance sheet we ended the quarter with net debt of $1.429 billion including capital leases and real estate liabilities and net of $57 million in excess cash, restricted cash and short-term investments.

The $42 million in net debt from last quarter consists of the following: Adjusted EBITDA of $78 million and real estate proceeds of $12 million offset by net cash interest paid of $25 million and taxes of $1 million, capEx of $23 million which excludes about $3 million of integration capEx, dark store occupancy payments of approximately $16 million, integration cash payments of about $9 million which includes approximately $2 million of severance and acquisition costs that were charged against goodwill, other primarily working capital timing changes of $58 million which includes an estimated $48 million of typical, seasonal inventory build up.

The difference between this $48 million and the $28 million on Schedule Four of the press release is due to the transfer of over $20 million of inventory in the Pathmark general merchandise warehouse to C&S as they took over the operations of the warehouse in our third quarter. This is also the main reason for the decline in accounts payable as we now purchase our GM merchandise from C&S on much shorter terms.

To date integration cash payments totaled approximately $81 million and are comprised of approximately $14 million of capital, $25 million of acquisition related costs charged to goodwill primarily severance and $42 million of costs charged to the P&L. We continue to expect total costs of approximately $100 million which includes about $10 million of non-cash stock compensation for the integration incentive plan.

Revolver liquidity at the end of the quarter was about $121 million comprised of borrowing base availability of about $78 million and excess cash on hand of $43 million. Outstanding loans totaled $362 million and letters of credit totaled $229 million.

We expect to lower our debt going forward as we expect to be cash flow positive for our fourth quarter and for fiscal year 2009. We are closely monitoring our liquidity levels and have sufficient liquidity based on our current operating plan. That said, given this uncertain economic environment we will seek means to further strengthen our liquidity.

A comment now on our closed or dark store rent liabilities. Given the economic climate and real estate markets particularly in the Michigan area during the quarter we increased our liability for dark stores by a $5.7 million charge to discontinued operations. The liability currently totals approximately $180 million and reflects our best estimate on remaining costs given the current market factors.

We have completed a preliminary view of the impact of the market decline on funding requirements for both company sponsored and multi-employer pension plans. At this time we do not anticipate a significant increase in contributions for fiscal 2009.

With respect to the Lehman bankruptcy, as we mentioned last quarter Lehman Europe is party to a $3.2 million share lending agreement with A&P. During the quarter we assessed that Lehman will likely not be able to fulfill its obligation and return the borrowed shares. As such we have excluded those shares as issued and outstanding at the beginning of the third quarter for purposes of computing and reporting our company’s basic and diluted weighted average shares and earnings per share information.

I would like to further address the outstanding share count used in our fully diluted earnings per share calculations. The calculations are quite technical and are impacted by the market to market accounting of our warrants as well as our convertible notes. For the quarter the calculation results in a rather unusual relationship whereby the number of common shares outstanding under the diluted method is less than the number under the basic method. But note four of our 10Q which will be filed later today provides detailed calculations of the basic and diluted earnings per share.

At the end of the quarter we had a tax net operating loss carry forward of approximately $540 million to offset future tax profits including operating profits and capital gains. I would like to summarize the quarter as follows: Our Fresh Gourmet and other business segments experienced solid growth during the quarter both in sales as well as operating profits. We have made significant progress in addressing the Pathmark margin issues from the second quarter but continue to have challenges with stock losses.

With respect to synergies we continue to increase the run rate of synergies and still expect to achieve the $150 million annual run rate by the end of this fiscal year. We remain financially strong. Our third quarter is typically a cash use quarter specifically with the build up of inventory for the holiday season. We continue to expect to be cash flow positive for the fourth quarter and fiscal 2009 and remain focused on reducing our leverage.

Lastly, with respect to our debt outstanding none of our debt instruments have operating covenants and we face no maturities until the middle of 2011.

I’ll now turn it over to Eric.

Eric Claus

Thank you Brenda. Good morning and happy New Year to you all. Given the tumultuous environment we are living in and having heard as recently as this morning the December retail sales report this morning I am really quite pleased to report our third quarter.

We continue to make real progress on almost all fronts keeping us on a long-term trajectory that will keep this company closer to the level of earnings it should be generating. Let me discuss now a little bit about our operating performance in the third quarter and I will also make some commentary on our current trends in the fourth quarter.

Our top line results were respectable and as Brenda mentioned we were close to 2% comps generated by A&P, our discount business and Gourmet with about 0.5% decline in our Pathmark stores. We are seeing clearly a shift in the consumer behavior with customer counts overall lower than last year. Customers are buying less units while the dollar and basket growth is being driven by inflation which ran north of 5% in the quarter.

Consumers are limited in their budgets and there is a direct correlation that can be made between inflation and/or deflation relative to unit sales and customer count. We are starting to see the deflation in certain sectors of the business and therefore our merchants are focused on maintaining dollar profit in these categories.

Adjusted EBITDA for the quarter is $78 million is a significant improvement over last year on an apples-to-apples basis which was $45 million last year, a $35 million improvement driven by our core business.

We were quite pleased with our Thanksgiving business as we created strong momentum in Fresh, Discount and Gourmet. Price Impact on Pathmark sales were negatively impacted by the elimination of the traditional “free turkey” promotion. Some of you remember back in Thanksgiving of 2006 where we encountered a very similar sales impact at A&P when we eliminated the free turkey promotion in our A&P stores.

This is difficult when done for the first time but it is clearly the right strategy for profit and long-term as we have seen in our Fresh or core A&P business.

Let me talk a little bit about fourth quarter sales.

From the Christmas to New Year’s holiday period we were not as strong as the Thanksgiving holiday primarily because of the following: The Christmas, Hanukkah and New Year calendar change which you have heard from some other retailers also fell on days that were not nearly as favorable to selling as prior year. We also experienced some negative weather events and heavy discounting by the general merchandise retailers negatively impacting the general merchandise holiday sales.

Actually a testament to the fact and a good example that discretionary spending is defined by the fact that gift card sales for the holiday period declined about 20%. That said we are satisfied with the results and have managed the margins well and sales seem to be bouncing back somewhat in the last week or so.

Given the difficult economic environment and aggressive competitive landscape we have effectively shifted and modified merchandising and marketing strategies making us even more relevant in all formats. This is an advantage that we as food retailers have as for the most part we are not buying as far in advance as general merchandise retailers would.

We put considerable effort into re-branding, packaging and consolidating our private label portfolio driving our overall company penetration to over 17.5% as we speak which is roughly a 200 basis point improvement over a year ago. Our private label program has now been harmonized between Pathmark and our other A&P formats with the lions share of our assortment sporting the Americas Choice and Smart Price labels and this is where we have put our efforts given the economic impact we are feeling.

The Pathmark consumer has embraced the Americas Choice line as we have transitioned away from the former Pathmark brand and that is good news for us. On the synergy front we have made great strides with the synergies attaining the $140 million run rate at the end of the third quarter which ensures us we will attain the $150 million run rate target we committed to for the end of this fiscal year.

On the supply side of things our relationship with our distribution provider and partner C&S continues to improve as we collectively seek cost savings and efficiencies while learning to manage our individual businesses under the new contract. To that end, service levels have significantly improved particularly in the Pathmark stores.

Once again as evidenced in our segment reporting the results in our Fresh, Gourmet and Discount formats all showed strong growth both in top and bottom line with betterment in trends for Price Impact businesses and let me explain some of these trends.

When it comes to our Fresh format, after 3.5 years of format development we continue to make significant headwind in the third quarter with strong comps and an improvement in the base business as well as the stores with capital improvement. EBITDA in the Fresh significantly improved over prior year with many initiatives paying off including the improvement to our Super Fresh business in the south. Our Fresh merchants and operators continue to deliver a much improved shopping experience that delivers value and a superior Fresh offer and we have been gaining in our market share in most of our markets.

When it comes to Price Impact, our Pathmark stores also experienced some improvement. Although modest it is clearly a trend and has reversed from the declines we were experiencing in past quarters. We have corrected the processes and systems issues that plagued us in the previous quarters. We now have a good handle on our merchandising income and we have seen improvement in that line although offset by some increased fringe labor costs and some higher stock losses, both issues that we are very, very focused on improving.

We have seen some great improvement actually in the last 24 inventories in our latest period eleven in stock losses in the Pathmark stores and that is encouraging and should start showing up in the months to come.

We have started the implementation of a very planned and time staggered pricing strategy developed by our merchandising team that will further enhance Pathmark’s price positioning in the market. This is being successfully implemented by an experienced and talented store team ensuring that we protect our margins.

Pathmark’s private label penetration increase has been aggressive and our new merchandising strategies are gaining traction. Our Philadelphia initiative converting our two Super Fresh stores to Pathmark Saver Centers is showing early positive signs of very favorable consumer acceptance. The entire Philadelphia conversion re-fresh strategy should be complete by year end giving us a strong Price Impact presence in that market.

A general statement I would make as it pertains to Pathmark I would say that acquisitions of this size are never easy and this one was no exception. After one year now clearly we are on the right track and this acquisition is and will continue to be very beneficial for the whole company and to our long-term strategy.

As it pertains to Discount, our Discount business operating under the Food Basics banner is once again realizing tremendous and unprecedented growth in both top and bottom lines. These former severely under performing, money losing stores have moved into the black and our very talented team of operators and merchants are chomping at the bit for more opportunity. The current economic environment is certainly helping to drive this format.

We are also in the planning stage for more store conversions to this format as well as new sites in urban markets.

When it comes to Gourmet I am pleased once again to report that despite the Wall Street crash this group of Manhattan stores continues to grow top and bottom line in a very meaningful way. The Food Emporium team’s merchandise mix revamp which is driving innovation and quality new merchandise lines is paying off with significantly year-over-year EBITDA increases. The stores with capital investment continue to be real trendy hits in Manhattan.

Let me talk a little bit about our outlook for fiscal 2009. In light of the current economic outlook and environment we will continue to manage the company conservatively, only spending capital that we have earned and managing costs tightly. Most of the modest capital spending plans for 2009 will be directed at Discount and Price Impact and some off-Manhattan conversions of Food Emporium to A&P Fresh. We will complete about 56 projects at lower cost affecting about 12% of our store base which is not a bad number for a limited capital spend.

We will closely manage cash and seek out means to additionally increase liquidity by providing opportunity for the growth of the business. We will continue to modify as needed our merchandising and marketing strategies in order to stay ahead of the game as it pertains to our financially stressed consumers and competitive environment.

We believe we are very well positioned with our format strategy and I am very appreciative of the tremendous work ethic and commitment of our team that is striving for the continued improvement of our financial performance in spite of the economic environment.

I thank you and I will now pass it back to Chris.

Christian Haub

Thank you Eric. Let me close our presentation with a brief summary of what you have heard from us today. We have completed the integration of Pathmark and we are generating the acquisition synergies as expected. Our core A&P business is performing strongly and we have successfully addressed the transition issues being encountered in the Pathmark business.

We remain confident this acquisition was the right decision and strengthened A&P both strategically and operationally. We are of course concerned about the deteriorating economy especially rising unemployment but we believe we are well positioned to deal with the challenges of a more difficult consumer environment and are encouraged by our current results.

Our format strategy is definitely succeeding in the market place. We are poised to deliver continuing improved results in 2009 including positive cash flow and we remain on track to achieve our long-term performance goals.

Thank you as always for listening to our presentation. We are now pleased to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of John Heinbockel – Goldman Sachs.

John Heinbockel – Goldman Sachs

If you look at Pathmark comps do you know the impact of ending the free turkey promotion? I know it is probably hard to get at that but if you strip that out what would that impact have been and have we seen the bottom in Pathmark’s comp trends at this point?

Eric Claus

It is hard to tell. You can’t really quantify what it was. We had the same thing when we did it at A&P a couple of years ago. It is painful the first year. It was definitely beneficial on the margin line and I think going forward there is just upside to that. To give you a specific number on that I couldn’t do that. I would if I could but I just don’t know what that number would be.

John Heinbockel – Goldman Sachs

If you look at the last four or five weeks have you seen any clear bottom in their trend and improvement or you don’t know quite where the bottom is yet?

Eric Claus

The last four or five weeks have been funny just because of the calendar change. Every holiday is two days later than the year before plus we had a week shift so it is very, very difficult to measure. I would say we feel very good about Pathmark. Again, I don’t know exactly how much inflation at the beginning of the year and then deflation in the second part of the year is going to have on the numbers but we feel good about the merchandising strategies, what we are doing in the stores. I think the managers feel good about it and I think we will have a good program. Clearly the turkey thing we took away a tradition which is not an easy thing to do but like I said I think it is the right thing to do.

John Heinbockel – Goldman Sachs

Do you think in the next fiscal year will Pathmark out-comp A&P or no that would be difficult to achieve?

Eric Claus

That is so difficult to guess because you don’t know what the other guys are going to do. Look at the surprises thrown at us in 2008. I would hate to want to predict 2009 now. I can just tell you a lot of the things we didn’t feel we had a handle on, our out of stocks are significantly better now, our merchandising income team and promotional planning team is really in place. We have the right people doing the right things. It is not dissimilar to A&P a couple of years ago when we had some really dismal results in terms of store contribution and we have seen those climb three years in a row and I think we have a very talented team that will be able to do the same thing at Pathmark.

John Heinbockel – Goldman Sachs

Secondly, where do we sit with vendor trade spend? It looks like it is at a fairly low level compared to where it has been historically across the industry.

Eric Claus

I would agree with that. The one thing that we are seeing is that as fuel prices come down and as some of the commodity prices come down the vendors are quite reticent to put that into cost of goods and are now throwing it into funding. So there is an opportunity for us to take advantage of that in the funding and I have to tell you also we are being very, very forceful in terms of those vendors that did give us the price increases when fuel went up and commodities went up that they have got to be the first to give us the price decreases when fuel comes down and commodities come down.

John Heinbockel – Goldman Sachs

So trade promotions come down, do you think items per basket will go up over the next year or no?

Eric Claus

One thing definitely that we have seen it is not a one-to-one correlation but there is 100% a correlation between pricing deflation so if we start experiencing some deflation say in the second and third quarters of fiscal 2009 then we will see the units go up. I wouldn’t say it is a one-for-one trade off but just as we saw them go down with the inflation we will see the reverse when the prices come down.

John Heinbockel – Goldman Sachs

Finally, where are we with the C&S contract? Have you seen any clear bottom line benefit to this point and if not when do you think we will see that?

Eric Claus

Next year. We made some changes where in the latter half of next year with some distribution centers should certainly be effective. We have managed, even though you can’t see it, but with the increase in the price of fuel working with them to mitigate shipments and redistribute to get less loads going to stores and managing to mitigate much of the fuel and energy cost rises. So far it has been really good. It is also helping us on the merchandising side of things. Buying together and working together on collective purchases. It is pretty good. It has been a learning experience. We are getting through the first real budget with them and that is coming along nicely. We are both mutually incentive on the same thing for the first time so it is good.

Operator

The next question comes from Karen Howland – Barclays Capital.

Karen Howland – Barclays Capital

I was wondering if looking back at sales the A&P sounds like things are decelerating somewhat in the fourth quarter. I know it is difficult to gauge but are they still trending positively?

Eric Claus

In the fourth quarter?

Karen Howland – Barclays Capital

Yes.

Eric Claus

Again it is hard to tell because of the shift. I would say flattish is probably a better word for it. We will have a better gauge once we are past the full holiday season now. So in the next three to four weeks it will probably be a better gauge than the last three or four weeks.

Karen Howland – Barclays Capital

But through the holiday season they were flattish?

Eric Claus

Yes.

Karen Howland – Barclays Capital

Can you go into a little bit more detail as far as the change in the pricing strategy at Pathmark?

Eric Claus

What we are doing with Pathmark is really a strategic price investment in relevant items. What we want to be careful in doing just like we did in A&P I think we were very effective in making A&P much more relevant from a price point of view was to manage the mix. I remember years ago we did something in a division where we just dropped the prices and you just don’t get credit for it and you just end up really deteriorating your bottom line. So we are doing it in a very staggered way. We have much more of our center store, the yellow tag specials. We have a different strategy with our flyers. We have increased dramatically our private label penetration, packaging, look, the exposure it gets in flyers. Without saying a whole lot more than that, for competitive reasons I have to be careful what we say, we are also very market targeted in terms of our pricing strategy that we ensure that we have the right prices for the right competitor and we do always pick the lead price competitor in every market that we price against.

Karen Howland – Barclays Capital

So as I understand it sounds similar to what you did at A&P about a year ago where making sure you are right priced and aggressively priced on select items and then perhaps raising prices in other areas to offset that on the margin?

Eric Claus

Actually there hasn’t been a lot of increase in prices. If anything interestingly enough you can take your very blind and dead items you are really moving nothing on and reduce the prices there to actually get some decent volume and decent margin out of those. So a lot of it is very strategy merchandise mix shift and Rebecca and the team, we have a pricing specialist team, and it is like a science. They are very, very precise on how they manage the categories and every category has its targets, where we want to be, where are we relative to our competition and so far so good.

Karen Howland – Barclays Capital

How do you get the message out to customers that you are making these changes in price?

Eric Claus

You are going to see a lot more of that in the next couple of periods. I won’t say much more than that. You will be seeing it definitely.

Karen Howland – Barclays Capital

You mentioned private label has been increasing at Pathmark. Did you give the number as far as penetration there?

Eric Claus

The penetration level at Pathmark is about 17%.

Karen Howland – Barclays Capital

Last quarter it was?

Eric Claus

I don’t remember last quarter but last year it was somewhere between 14-15%.

Karen Howland – Barclays Capital

Brenda, I was wondering if you could talk about the magnitude of the debt you think you will be able to pay down next year?

Brenda Galgano

If I give you that you can back into what we think our earnings might be so I am reluctant to give you that.

Karen Howland – Barclays Capital

There are reasons I ask these questions.

Brenda Galgano

I’ll just stay with that we feel quite confident we will be cash flow positive.

Operator

The next question comes from Karen Short – Friedman, Billings, Ramsay & Co.

Karen Short – Friedman, Billings, Ramsay & Co.

What do you think is driving the stock loss issue at Pathmark? Has it gotten worse than when you initially made the acquisition? What are you seeing there?

Eric Claus

I’ll try to make a half hour answer in less than a minute. When we took it over we had certain assumptions on stock loss. The way in which certain things were accounted for at Pathmark were not the same way as we account for them at A&P. Not that it was at all dishonorable but it kind of covered some of what the real stock losses were. So when we did it on a real stock loss basis we saw there was significantly higher than what we had anticipated to be and therefore when you take stock losses you have a theoretical and actual to use in every reporting period because you don’t take all stores all the time.

So, in the beginning we were too low and then when we saw what the real numbers were coming at like they came out significantly higher than what we had thought and they now carry that theoretical amount so just by way of example in period eleven which we just finished we had 24 stores that came in at a stock loss level that was probably about 60% less than what we had been running at. That stock loss level I can’t say that is what it is going to be for every period going forward but it is a significant improvement to where we were and hopefully we can keep some of that. That takes a bit of time as it goes into the theoretical. Just to go over the accounting rules you can’t just in one day say that is what our stock loss is and apply it to all stores.

We should see some improvement and I would also say that Paul Weisman is a great operator and when he took over Food Basics we had 300 basis points of stock loss. We are down in the 80 basis points now. A&P was significantly higher. When he sets his mind to getting that down he has the team. I think the same thing will happen with Pathmark.

Karen Short – Friedman, Billings, Ramsay & Co.

Turning to the competitive environment for a second, you obviously have made changes with your turkey and some of your promotional activity. Two of the banners in the Northeast and I guess the first question is there any sign that competitors might be following and becoming more rational? I realize the climate is bad. The second is an update on the competitive environment in general. The third question I had on the competitive environment relates to Aldi. There was an announcement they plan to open more stores in the Northeast and I was curious what you think the pricing is at Food Basics and Pathmark compared to Aldi Do you have any sense of where you stand?

Eric Claus

Let me do the first two and I’ll let Chris do the Aldi question. When it comes to the turkeys there is not that many people that still do it. Obviously quite a few have gotten off of it. I can’t predict whether others will or not. We know that with A&P our top line is very strong and our bottom line is much stronger for it now. I think we will have the same net effect on Pathmark going forward. Generally speaking in the competitive environment the Northeast is very aggressive. It always has been. It is a very high/low market and continues to be very aggressive. I think it sometimes gets crazy aggressive in specific markets. It could be four or five stores. We all now have the ability with electronics and targeted mailers to fight those battles in specific zones. So it is not a massive all-out war of prices right across the board.

I think a lot of our competitors also their businesses are holding up and I think we are all competitive. We are all fighting for the same dollar and we want to get the bigger piece of the pie but at the end of the day we can say it is much worse than we have seen in the last couple of quarters.

Christian Haub

Just a few words on Aldi. Obviously we are very familiar with their concept from our experience in Europe. There is no question that this format will have a certain appeal but it is very different than any of our existing formats because it is an extremely limited assortment and their prices are very, very good. I mean, generally when you look at price surveys Aldi prices even significantly are below Wal Mart. Our intention wouldn’t be to compete with them head on the limited assortment they have. But also their stores do relatively limited volume and in competing with Aldi stores for a number of years when they open new locations and don’t see any dramatic shifts in terms of our volume going to their stores. Actually we believe our Food Basics concept is much better positioned because it has a much more comprehensive offering and it is executed extremely well to the local market. The kind of sales growth we have seen in the last two years is of course extremely encouraging. I think us opening one Food Basics store and the kind of volumes we generate in those stores is probably more than several Aldi stores put together.

It is something we will take seriously but it is not something we are concerned about.

Operator

The final question comes from the line of Robert Summers – Pali Capital.

Robert Summers – Pali Capital

You have done a really good job of working through some of the integration issues. The next question is are there any proposed changes that you are planning to potentially put further stress on the overall system?

Eric Claus

No. Actually we have a pretty robust system. We are pretty well done. We are focused on retailing now.

Robert Summers – Pali Capital

I think you said and correct me if I’m wrong that gift card sales were down 20%?

Eric Claus

Yes for the holiday season. The holiday season is the lion’s share of gift card sales.

Robert Summers – Pali Capital

So the follow on is there any portion of that which is on your own card that might impact January sales that we should know about?

Eric Claus

No. It is so insignificant it wouldn’t be worth talking about. Usually those gift cards are for the electronic stores, the large consumables and I think that was a combination of it is discretionary and there is a lot of media around don’t buy gift cards because they are thinking people are going to go out of business. I think you would find if you checked with any other retailers they probably have similar kinds of decreases.

Robert Summers – Pali Capital

I think you did indicate there was a favorable calendar shift during the quarter. Is there a magnitude behind that so we can maybe balance it out and think about what the right run rate is?

Eric Claus

It hurts a little bit but it is in fractions of a percent. I wouldn’t make any major calculations on that.

Christian Haub

I think that concludes our third quarter conference call. We thank you all for participating and we will talk to you at the end of our fiscal year. Thank you very much.

Operator

This does conclude today’s conference call. You may now disconnect.

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