A&P: Time to Go Long

A&P (GAP) delivered solid third quarter results, and its share price was handsomely rewarded as buyer's tacked on more than a 25% gain. A&P was expected to post a 35 cent loss on revenues of $2.17 billion, but was able to beat estimates by nine cents, reporting a smaller than expected loss of 26 cents. Sales were up 70%, matching top line estimates. EBITDA was up almost 400% from $20 million to $78 million.

Management was very pleased, as Christian Haub, A&P's Chairman of the Board, explained:

"Despite the challenging economic environment, we delivered strong results with solid sales, and year over year earnings improvement in the third quarter . We completed the integration of our Pathmark acquisition and look forward to future rewards of this strategic decision as we celebrate our momentous 150th anniversary."

Operational Improvement evident: The company has been successful in finally getting rid of all the bugs related to its Pathmark acquisition. As a result, its gross profit margin improved 60 basis points from 30.5% to 31.1% while its SG&A costs were slashed 160 basis points from 32.2 % of sales to 30.60%.

The future: Management indicated they are confident of being cash flow positive in Fiscal 2010 and intend to utilize this free cash flow to reduce debt. The company has good liquidity and no debt maturities within the next five years.

Bottom line: Jump on this huge momentum train and ride this one up to the $12 area, as the train gathers momentum, and in the process, 'squeezes' out much of A&P's 7 million share short position. Other catalysts providing fuel for an impending run-up: (1) probable broker upgrades (2) further buying by A&P's largest single shareholder, the Tengelmann Group (3) continued sector improvement.

The stock could see $12 by the end of the month and $20 by the close of 2009.

Disclosure: Long

Comments

[Garland Pol...:]

Mark. Glad you are positive on A&P. They have a great brand; nostalgia colors my image of them, even when they totally screwed things up in the 1980s. My only criticism is that they really need to figure out a store format and square footage that not only sells like crazy, but could compete right next to a Wal-Mart. Walgreen's can do this, and so could A&P. The other thing. They need to go BACK to the round A&P logo. It was perfection, and is still known by anyone over 40.

Jan 09 11:15 AM

[darkmark:]

this stock has and always will move in an exaggerated replica of spy. sooo, why the big 12$ number for the end of the month? wishful thinking.

Jan 09 11:46 AM

[jepittman:]

I like your idea. A&P is a stock likely to survive and prosper down the road. The trouble I have with it right now is it has had a pretty good lift off the lows and the market seems to be in no hurry to snap up stocks with high debt and dealing with acquisition absorption. I would prefer to let this one come back in some and then take another look.

One thing I believe you are right about is it's possibilities for VERY large gains as investors' appetite for risk improves and their business improves.

Jan 09 04:53 PM

[mproc:]

I like GAP to see upper teens - $20 by the end of the year as well. The real question is - will we see GAP pullback to the lows ($4-$6) that we saw in Nov. or Dec. of '08 to provide a better buying opportunity. I think the markets will retest the lows. Any thoughts Mr. Krieger?

Jan 10 10:17 AM

[Mark Krieger:]

some profit taking is in order, but I see the shares dropping no lower than the $6.50 to $7 range. I was impressed to see GAP shares make a nice comeback friday, bouncing 6% from its lows on the day to close north of $8


On Jan 10 10:17 AM mproc wrote:

> I like GAP to see upper teens - $20 by the end of the year as well.
> The real question is - will we see GAP pullback to the lows ($4-$6)
> that we saw in Nov. or Dec. of '08 to provide a better buying opportunity.
> I think the markets will retest the lows. Any thoughts Mr. Krieger?

Jan 10 10:43 AM

[H.J. Huneycutt:]

I've thought about A&P a few times, but I'm not completely sold on it. Theoretically, a recessionary environment should be somewhat of a boon to grocers. I also think that high gas prices help most grocers as well because people are less likely to drive out to the Super Wal-Mart when that drive costs them $5. Despite having both of those advantages, A&P's numbers still look ugly.

I haven't shopped at an A&P owned store in a few years, but I would use to go to SuperFresh occasionally in 2006 and it seemed like a store without a niche. I'm still not sure this company has a niche.

Betting on the (Once) Great A&P is a risky business. They still have a tremendous debt load (even by grocery store standards) and they still haven't proven they can consistently bring in free cash flows. I'd like to see them survive, but I'd be reluctant to wager any money on it --- even given my own high-risk investing style.

I do agree with BrandlandUSA about the A&P logo. In fact, instead of having a gazillion different supermarket brands, I'd like to see A&P rebrand all of its stores as the "Great A&P". It's an awesome name. Especially when you see it the long way --- the Great Atlantic & Pacific Tea Company. Now there's a grocery store I could shop at! Screw short names --- the Great A&P should buck the trends and use the charming long-form name. Maybe that could be the first step towards actually finding a niche for this chain.

Jan 12 03:04 AM