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Executives

Krystyna Lack – Vice President, Treasury Services

Ron Marshall – President and Chief Executive Officer

Christian Wilhelm Erich Haub – Executive Chairman of the Board

Brenda M. Galgano – Chief Financial Officer & Senior Vice President

Analysts

Karen Short – BMO Capital Markets

[Reed Kim] – Bank of America

Bob Summers – Susquehanna Financial

David Marsh – MacMahan Securities

Jonathan Feeney – Janney Montgomery Scott, LLC

Colleen Burns – Oppenheimer & Co.

Great Atlantic and Pacific Tea Company (GAP) F4Q09 Earnings Call May 6, 2010 11:00 AM ET

Operator

Welcome to the Great Atlantic and Pacific Tea Company’s conference call. (Operator Instructions) For your information, a webcast is available on A&P’s website at www.APTea.com. Chairing today’s call will be Ron Marshall, President and Chief Executive Officer. Also participating on today’s call will be Christian Haub, Executive Chairman and Brenda Galgano, Senior Vice President and Chief Financial Officer and Treasurer.

I would now like to introduce Krystyna Lack, Vice President Treasury Services who will read A&P’s Safe Harbor disclaimer. Ms. Lack?

Krystyna Lack

Thank you and good morning. Today’s presentation may contain forward-looking statements about the future performance of company 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 that could cause actual results to differ from such statements including but not limited to competitive practices and pricing in the food industry, the company’s relationship with its employees, the terms of future collective bargaining agreements, the effects of legal and administrative proceedings, the nature and extent of consolidation in the food industry, changes in the financial markets which may affect cost of capital or access capital, supply or quality control problems with vendors and changes in economic conditions with may affect customer buying patterns.

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

Christian Wilhelm Erich Haub

Thank you Krystyna. Good morning everyone and welcome to our fourth quarter and fiscal 2009 year-end conference call. I would like to take this opportunity this morning to officially introduce Ron Marshall, our new President and Chief Executive Officer.

I am personally very excited about Ron’s appointment. Our Board of Directors, Tengelmann and Yucaipa believe Ron brings the necessary experience, background and track record to A&P that we believe is required to turnaround the performance of our company. His extensive knowledge of the food retail industry and the Northeast marketplace we operate in as well as his turnaround expertise will be key in placing the company on the right trajectory forward and enable us to realize the tremendous value potential of our company.

With that I would like to introduce and turn it over to Ron.

Ron Marshall

Thank you Christian. Good morning everyone. I am truly excited to be part of the Great Atlantic and Pacific Tea Company. Returning to the grocery business particularly here in the northeast is a special opportunity.

The past year was certainly a challenge not just for our company but for the entire industry. Upon joining the company I conducted an in-depth review and quickly determined that the economy was clearly not the only reason for our disappointing results. We face issues that are systemic, deep and profound and must and will be addressed before we can achieve the success that our shareholders and associates deserve.

Among these issues are a clear lack of brand identity in our principle banners, incomplete integration of the Pathmark acquisition and additional opportunities for significant cost improvements particularly in our supply chain.

Now let’s review our financial performance which reflects the impact of these issues as well as the broader economy had on our business. Sales for the 12-week fourth quarter were $2 billion. Comparable store sales decreased 4.8%. Sales for the 52 week full-year were almost $9 billion and comp store sales decreased 4.3.

At this point I will turn the call over to Brenda to review the financials in much greater detail.

Brenda Galgano

Thank you Ron and good morning. Today we reported fourth quarter sales of $2 billion and a loss from continuing operations of $158 million. As Ron mentioned comparable store sales were negative 4.8% for the fourth quarter primarily driven by deflation and a decline in overall item count.

Excluding the non-operating items of $124 million this quarter adjusted EBITDA was $41 million versus $86 million last year. I would remind you last year’s results do include an extra week which we estimate resulted in approximately $6 million of EBITDA. While schedules 3 and 4 of the press release detail the non-operating items for both years, I would like to provide you additional details on the larger adjustments.

First, given our operating results we recorded non-cash charges of $65 million related to goodwill, trademark and long lived asset impairments. Of this amount $39 million is related to Pathmark trademark and long lived assets and $26 million is related to goodwill and long lived assets for our Super Fresh business.

Second, we recorded a $40 million adjustment to our insurance reserve due to the negative development of prior year’s claims as determined on an actuarial basis. This was primarily driven by Worker’s Compensation claims in the state of New York in which we experienced much higher losses than other states due to tougher regulations on payment caps and length of benefits. As our business has been migrating from a geographically fragmented business operating in different parts of the country to a business focused in the Northeast the claims have been shifting with a much higher proportion of accidents in New York state resulting in this change in estimate. In addition to the $40 million adjustment we also reported an additional $13 million adjustment in discontinued operations relating to this negative development.

Third, net restructuring and other primarily includes severance from our corporate labor rationalization initiative which was completed in March and will result in annualized cost reduction of $22 million.

Fourth quarter ongoing gross margin including a LIFO credit of $2 million this year and expense of $3 million last year decreased 69 basis points to 30.36%. Gross margins were impacted by more promotional sales and price investment as we continue to fight for market share in this highly competitive environment. Fourth quarter adjusted SG&A increased 111 basis points from 29.92% to 31.03% driven by lower sales leverage on fixed costs mainly labor and occupancy and increased marketing expense. These cost increases were partially offset by a decrease in corporate admin costs.

Capital spending totaled $14 million in the quarter. Depreciation expense was $54 million. This compares to $30 million of capital expenditures during last year’s fourth quarter with depreciation of $60 million. Capital spending for the full-year totaled $86 million and included five new stores, six remodels and four store conversions. Our capital plan for fiscal 2010 will be in the $75-100 million range and will focus on remodels of our existing store base.

Turning to our balance sheet, excluding the preferred stock liability we ended the quarter with net debt of $1.306 billion which includes capital leases and real estate liabilities and is net of $169 million in cash equivalents and restricted cash. We are focused on our nearer term debt maturities and are evaluating a number of capital raising alternatives and will communicate our plans at the appropriate time.

Regarding the classification of preferred shares and as I mentioned last quarter based on the applicable securities laws on the day of issue approximately 1/3 of the preferred shares are convertible after one year of their issue date. In accordance with GAAP and until such time the shareholder approval was obtained approximately 2/3 of the preferred shares were classified as preferred stock liability on our balance sheet. With the receipt of the shareholder approval in the fourth quarter the preferred stock liability was reclassed from liabilities and included with the other preferred shares on our balance sheet.

With respect to our equity share count on a dilutive basis from an enterprise value perspective our total outstanding share count is approximately 90 million shares. Using 56 million outstanding shares we add 35 million in convertible preferred shares plus 1 million for in the money stock options less 2 million shares still to be returned under the share lending agreement.

For the quarter free cash flow was negative $26 million consisting of adjusted EBITDA of $41 million offset by net cash interest paid of $53 million and CapEx of $14 million. The $21 million increase in net debt from last quarter resulted from the following; negative free cash flow of $26 million, payments against dark store liability of approximately $18 million, an offset by seasonal working capital changes and other of $15 million and real estate proceeds of $8 million relating to the sale of two locations previously closed.

Liquidity at the end of the quarter was approximately $372 million comprised of $203 million of availability under our credit agreement and short-term investments of $169 million. Outstanding loans totaled $132.9 million and letters of credit totaled $202.3 million. As of the end of the quarter we had a tax net operating loss carry forward of $665 million to offset future tax profits including operating profits and capital gains.

Free cash flow was negative $17 million for the year. We continue to be focused on cash generating initiatives including working capital management and maintaining sufficient liquidity in this very difficult operating environment.

I will now turn it back to Ron.

Ron Marshall

Thank you Brenda. Let’s discuss our current initiatives and how they support our new strategy. Our immediate priority is to first and foremost stabilize the company and create the runway necessary for our plans to take root.

As Brenda discussed earlier this has forced difficult but necessary decisions across the business including reductions in the corporate office and in the field resulting in $22 million of annual cost reductions. In addition, it is critical we have a management team in place that will drive results. To that end we recently appointed Mark Kramer to his position as Senior Vice President of Operations. Mark brings significant experience in grocery retail operations and possess the strategic skill set which will undoubtedly put our operations team on the path forward.

Next we have reevaluated our CapEx plan to ensure that our company resources are spent wisely. Today for example all CapEx spending has to be approved by me personally. I would like to review some of the strategic initiatives already underway. Our primary goal is a laser focus on our customer’s experience from the moment they enter the store. This begins with our Clean Sweep project which began in Q4 and was intended to improve sanitation, cleanliness and resolve significant amounts of deferred maintenance expenditures.

In addition, our renewed make it personal program has been designed to comprehensively raise our customer service to the highest level. Many of you will recall the great service program that Jim Donald developed in Pathmark years ago. MIP will restore our customer service to those levels again. We have begun the process of clearly defining the separate brand identity of our legacy stores as well as Pathmark. In legacy phase I of the new lower price project is already underway with a comprehensive restructuring of our pricing. This program is so significant we selected a very special spokesperson, Kelly Rippa.

Kelly personifies the A&P brand as she shares our same commitment to family, quality and integrity. Kelly was the only individual I considered to introduce our customers and associates to this exciting new program. We are going aisle by aisle, item by item, sharpening our price points and reducing prices in 31 categories. Lowering item prices, some by as much as 10% which has saved our customers over $24 million since its inception and that is just the beginning. We have been able to do this in a margin neutral fashion funded through other promotional opportunities.

In Phase II we will lower prices in meat and produce as well, further lower prices at center store, launch a new rewards based loyalty card, roll out a new front end service initiative, begin a new special request program, implement the new mystery shopper program and introduce our Food Basics and Home Basics private label brands which is our fighter brand as well as an upscale Food Emporium Trading Company brand.

With respect to Pathmark we have a project, MMX, which is already underway. For those of you who are not current in your Latin it is Roman numerals for 2010. MMX is a return to Pathmark roots and returning to those values which made this brand so great. Project MMX is designed to improve variety, improve in-stock and improve [inaudible] conditions. Project MMX is all about being right with displays, assortments, readiness, service, standards, sanitation and most importantly results.

The focus is on a customer centric merchandising with sharp ads which represent our demographic, enhanced monthly events, EBT mailers and the list which are featured low prices on the items each trade area customers really want to buy. Each Pathmark store will be categorized in one of our types based upon customer demographics and merchandise accordingly. These projects will re-energize how we go to market in our core map with a clear differentiation of our brands understanding our customers are unique in each manner and while value and price are consistent drivers they are measured differently by each customer segment.

Now let me take a moment to talk to you about our supply chain opportunities. We have taken initial steps to remove obvious costs out of the system. The Pathmark A&P distribution networks, however, were never really integrated leaving former Pathmark DCs servicing Pathmark stores and A&P DCs servicing A&P stores, literally resulting in trucks passing trucks on the turnpike. We are in the final stages of developing an optimal delivery network and plan to have it in place before year-end.

We are focusing on cost of goods, lowering LTL rate and improving supply and logistics including appropriate [inaudible]. We have a wide disparity in operating practices from store to store with widely divergent levels of efficiency. We are in the process of identifying best practices already in place in some of our stores that we can apply across our entire business which I believe is a tremendous cost opportunity.

These fixes are doable. The initiatives are already in place to put us firmly on the path forward. We expect Q4 trends to continue and while the initiatives underway should bend the trend curve we don’t have visibility today to how quickly they will gain traction in this quarter.

In closing, as an organization and as individuals we must ensure that we have all the skills necessary for success. Clearly we must have the expertise needed for our task. We must also have the process skills critical to ensure when we begin a job we finish it. But most importantly we must have the experiential skills like maturity, perspective, resiliency and grit to see us through this journey.

At this time I would like to open up the line for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Karen Short – BMO Capital Markets.

Karen Short – BMO Capital Markets

Maybe starting with basics like sales throughout the quarter. Can you give us some color on what the sales trends were throughout the quarter and how they are looking in the first quarter so far? Then maybe talk a little bit about what the impact of the storms were on the top line and the bottom line?

Ron Marshall

You made an observation about weather. Clearly the sales trends during the fourth quarter were pretty lumpy as we cycled through those events and also as we cycled through some calendar issues specifically revolving around Super Bowl. Brenda in a second can talk about the storm impact but essentially we are seeing those sorts of trends with the same sort of bumpiness because of weather in the first quarter that we experienced in the fourth quarter. Brenda any observations?

Brenda Galgano

I would say looking at the storms in the fourth quarter we would estimate the impact of that was approximately 1%.

Karen Short – BMO Capital Markets

Positive?

Brenda Galgano

Yes.

Karen Short – BMO Capital Markets

You mentioned deflation. Do you have deflation on the cost side, a number?

Ron Marshall

No not really a number we care to disclose. There are so many issues that flow into that and everyone’s measurement technique is different, just take as a given there was still some pressure in the fourth quarter. As I am sure you are hearing from everyone else as we look into the first quarter there has been some uptick in inflation in key commodities and most of those commodities we have been able to pass those through.

Karen Short – BMO Capital Markets

I guess looking at pricing I know there have been a couple of waves of price reductions. Can you elaborate on what those waves are or go over what those waves were again? Then kind of give a timeline of what you think needs to happen going forward?

Ron Marshall

Let’s talk first about the legacy stores and then we will talk about Pathmark. I think it is important in each of these discussions to make sure we have clearly defined differences. In our legacy stores we have now finished the first wave of price reductions in the lower price project where we lowered everyday shelf prices in 31 of our center store categories. We are in the process now where we are working through a similar sort of reduction in our perishable departments. When we are finished with that we will then circle around and take a look at some of the secondary and tertiary grocery departments to see what the opportunity is there. What is important to understand is that our pricing model had gotten out of balance over time. So the everyday shelf prices were too high necessitating temporary price reductions and what we call special reductions, [which is back reds], to be correspondingly too high.

We were able during the first quarter by balancing out that retail pricing we were able to do this in a margin neutral fashion. Now on Pathmark we are just beginning the process there and I would expect we will have announcements in the next 3-4 weeks on how we are going to market. Certainly I think all of these things will be accomplished by the time we roll into the selling season this holiday.

Karen Short – BMO Capital Markets

So are you completed at all the legacy and Pathmark by the holiday season?

Ron Marshall

Yes.

Karen Short – BMO Capital Markets

What is your price gap now? Are you comparing those to all of your conventional? Are you comparing to Shop Right? What is your primary area of focus for narrowing the gap?

Ron Marshall

Depending upon the market we are in we compare it to whoever the two largest competitors are and depending on whether you are in Long Island, Philadelphia or Baltimore that competition shifts. So as you would expect it is really all over the board and I wouldn’t care to generalize.

Karen Short – BMO Capital Markets

Turning to the labor opportunity maybe can you talk a little bit about that? Obviously given that you are union I guess I am questioning a little bit whether that is actually an area you have any ability to work on?

Ron Marshall

Of course you always have an ability. When we talked about our best ball project where we have actually gone in and I will be saying a final presentation this afternoon on what the best practices are throughout our organization. As we are able to implement those across the board I think we are going to see some fairly significant savings. It is premature to speculate or anticipate what they are but we think they are going to be quite significant and we think they are deliverable in the context of this fiscal year.

Karen Short – BMO Capital Markets

Turning to the balance sheet, first of all you are covenant light, right? There is nothing from a covenant perspective?

Brenda Galgano

That is correct.

Ron Marshall

I don’t answer balance sheet questions.

Karen Short – BMO Capital Markets

Maybe can you elaborate a little bit on capital raising alternatives and what the proceeds would be?

Brenda Galgano

Clearly we are focused on our most current maturities. We have convertible notes maturing in June of 2011. So we are exploring a number of different opportunities within the capital markets, non-core asset sales, sale lease backs, there are a number of different opportunities and quite frankly we are in the process of evaluating that and we will communicate at the appropriate time the direction we are going in terms of refinancing.

Karen Short – BMO Capital Markets

Is there any risk on the multi-employer pension side in terms of cash contributions?

Brenda Galgano

In terms of multi-employer we really negotiate increases in contributions as part of our overall labor negotiations. To the extent there are increases we would aim to balance things out overall. It is an overall negotiation. We don’t expect any significant one-time contributions at this point.

Ron Marshall

We are not aware of any need for a significant adjustment in contributions.

Karen Short – BMO Capital Markets

Can you talk about whether or not you see any banner consolidation opportunities or I guess underperforming store exits that wouldn’t result in any additional lease liabilities or dark store lease liabilities?

Ron Marshall

Sure. I think there are two questions embedded in there. The first question is we are in the process after MMX of really redefining what we think price impact represents for Pathmark. When we do that we will then review our entire store base and make some unemotional decisions about which stores should be in which format servicing which customer. The over-arching issue is that we are going to make decisions based upon what type of store they are, what customer base looks like and what the value expectations are in those communities.

Obviously with our stores like every asset in our company we are constantly evaluating them as I said before in a very unemotional fashion and we will make the right business decision as the events call for it.

Operator

The next question comes from the line of [Reed Kim] – Bank of America.

[Reed Kim] – Bank of America

I wanted to follow-up on the logistics initiative you talked about. Do you have a timeframe around that and maybe an amount of savings you might be able to tentatively offer in terms of what you are thinking there?

Ron Marshall

As I said before we are in the process of understanding exactly what an optimal distribution network is for our stores. We will be bringing that to a close, in fact we are actually doing that Friday, having a meeting there tomorrow on the best practices and Friday a meeting on optimal distribution patterns. It is premature right now to speculate on what that savings is going to be. Clearly we expect it to be significant and we believe by the end of the fiscal year it will be fully in effect.

[Reed Kim] – Bank of America

On bringing greater distinction I guess to call it that between the Pathmark and A&P brands is that going to result in some more SG&A? If you could maybe provide any color on that.

Ron Marshall

No, I don’t think so. I don’t think so. Again, the issue is on two separate levels. One is on a corporate admin level and the other is in-store level. From a corporate admin perspective we think we have the resources to sort of realign responsibilities to be brand specific. I think that is really the only way you are going to have people who are champions and have the courage to stand up for the brand. We have identified those folks in our organization and are in the process of realigning now.

The second is I don’t expect any SG&A increases to come from this. The second level is a store level question as we understand what the service models are in each of our stores. Clearly we are just in the beginning of exploring that. It is my belief as we go through the best practices review we are going to be absorbing any additional hours inside our savings. So in some cases we may be shifting hours around at the store to be much more customer centric.

[Reed Kim] – Bank of America

On the promotional side I know in the fourth quarter it was discussed around there that some of the promotions were maybe excessive and that affected things a great deal. Is there an actual dollar amount of variance that you could point us to between what happened in the fourth and first quarter here in terms of how you adjusted your promotional spending?

Ron Marshall

I would rather not. I think it goes without saying our pricing program in both banners was just out of balance. It is going to be a key initiative for us as we go throughout the year to get those rebalanced. It takes time for customers to appreciate that, understand the nuance of the pricing program. So we are going to learn as we go along through the second and the third quarters.

[Reed Kim] – Bank of America

I didn’t quite understand the comment about the short-term investments. Looking at the balance sheet cash is about $252 million and I think you said $169 million. I need to clarify that. Finally, on the financing scenarios you obviously have a little bit of margin to do some stock out of the company with the shelf registration is it fair to assume some of those scenarios might involve an issuance and maybe even some more contribution from your key shareholders? If you could help us with that it would help.

Ron Marshall

Brenda in a second will talk about the components of cash. The registration statement was really a contractual liability from our fund raise last year. So in other words you should read nothing into that other than we are fulfilling our responsibilities under that agreement. We are talking with each of our bankers every day about what the alternatives are. I happen to personally believe there is a lot of liquidity opportunity inside the company and we need to pull all those levers and push all of those buttons. Now cash is made up of, this is a balance sheet question so…

Brenda Galgano

I will address that. The difference is the cash that is within our stores and in float. So there is a footnote that provides a detail of that but it is primarily what I would consider working capital cash.

Operator

The next question comes from the line of Bob Summers – Susquehanna Financial.

Bob Summers – Susquehanna Financial

What was the traffic count in the quarter?

Brenda Galgano

We typically do not provide that level of detail but I will tell you it is negative and has trended to be negative throughout the year. So it was more negative in the fourth quarter than what we had previously been trending at.

Bob Summers – Susquehanna Financial

Back to this idea of rebalancing pricing it sounds like moving to better everyday shelf pricing, pulling in some promotional activity and it is one thing to talk about doing it in a margin neutral way but on the consumer side and I think Ron talked about awareness, it seems like there is a portion of the customer base that has been trained to shop in a certain way. Is there something planned to quickly get them up to speed on the way you are going to market?

Ron Marshall

Sure. The entire lower price project communications program is driven towards creating that awareness and driving people into the stores. It is a program that incorporates obviously our weekly flyer, it incorporates radio advertising you may have already heard and then in the very, very near future it will involve an extensive television campaign featuring Kelly explaining what our new pricing is all about.

Bob Summers – Susquehanna Financial

On a broader basis, thoughts on capital expenditures. I think if you look at what the company spent over the last 10 quarters or so and look at it either as a percent of sales or the level of D&A, one do you think that is an issue or could become an issue any time soon?

Ron Marshall

I don’t think it is an issue presently. Clearly the rates that we are spending today which are really intended to extend runway for the company, are not sustainable across time. Sometime in the next 2-3 years we are going to have to return to a more normalized CapEx program.

Bob Summers – Susquehanna Financial

Because we have limited exposure with each other, normalized is what 3% of sales to you?

Ron Marshall

It depends on how many stores are opening in the course of the year. I would say in a mature market like this it is somewhere between 2-3% but that is just a benchmark.

Operator

The next question comes from the line of David Marsh – MacMahan Securities.

David Marsh – MacMahan Securities

It sounds like you made a little bit of progress on the dark stores in the quarter. Do you have a count at year-end?

Brenda Galgano

A count of how many stores are dark?

David Marsh – MacMahan Securities

Yes.

Brenda Galgano

It is around 70 stores.

David Marsh – MacMahan Securities

Can you talk generally about progress on resolving those dark stores? Are you finding real estate owners to be more willing to work with you or more difficult to work with in general trying to resolve some of those dark store related issues?

Ron Marshall

You can’t do everything the first 2-3 months. I will tell you I am just now becoming engaged and picking up tools on this. I think we will have better visibility and able to provide better detail when we announce on the first quarter.

David Marsh – MacMahan Securities

With regard to the insurance, is this insurance adjustment taken in the quarter cash related charge? Is that something we should expect to see recurring in nature of smaller scale or is that something that is a one-time type of catch up you feel you got it all here knocked out in the fourth quarter?

Brenda Galgano

I would say certainly it feels like we have got it knocked out this quarter. The actuary did an extremely in-depth calculation of the reserve. Yes, you should not plan for adjustments like this in the future. With respect to cash, this is non-cash for the quarter. The liability does represent what we believe will be the cash paid out over several years.

David Marsh – MacMahan Securities

How much was drawn on the revolver at year-end? Were you drawing into that?

Brenda Galgano

We have $132 million of term loans under the revolver. We also have about $202 million in LCs. That would be it.

David Marsh – MacMahan Securities

So the availability is more driven by the borrowing base test than any change in borrowings?

Brenda Galgano

That is right. In fact within our annual report we have the calculation of that so you can see exactly the details of how we get to our availability number.

David Marsh – MacMahan Securities

Are you expecting to file the K this week?

Brenda Galgano

We filed this morning.

Operator

The next question comes from the line of Jonathan Feeney – Janney Montgomery Scott, LLC.

Jonathan Feeney – Janney Montgomery Scott, LLC

I wanted to follow-up on I guess the store on the composition. You mentioned traffic deteriorating over the course of the year. Maybe this is too nitpicky of a question but within the 429 stores are those traffic declines concentrated in a particular region or a particular group of stores you have your eye on or has that traffic decline been more or less across the board?

Ron Marshall

As Tip O’Neil once said all politics are local and all [inaudible] as well.

Jonathan Feeney – Janney Montgomery Scott, LLC

Nice Massachusetts reference.

Ron Marshall

So every store has its own story. I will tell you it is fairly broad based across banners and across geographies.

Jonathan Feeney – Janney Montgomery Scott, LLC

I guess that leads to my second question which is there have been a couple of non-traditional retailers; Target’s P-Fresh initiative is one of them that have announced expanded activity or increased promotional activity. How much of that actually comes to fruition in the marketplace is unclear. But what impact if any do you think the increased non-traditional activity from non-traditional grocers has had in your footprint particularly?

Ron Marshall

That is a really good question. It is difficult to see where those guys are grabbing share. I will tell you if I was going to characterize among the non-traditional competitors we have; you have the Targets of the world in certain limited cases fortunately. We have Wal-Mart that can be a factor. Certainly if you have seen a drug store flyer over the past 2-3 years they look increasingly, all three companies, look increasingly like supermarket ads.

Our personal view is that in this economy and in this market the club impact has been the most significant. One of the great things about the supermarket business is that you don’t have to develop anything. Everybody has thought about every problem and every contingency you could have. There are tool kits to help you be successful in combating super centers and having been in the upper Midwest I had a lot of experience with that with drug stores and particularly with the warehouse clubs. I think you will see in Pathmark specifically this summer a lot of return to the value packs, club packs that Pathmark had pioneered decades ago.

Jonathan Feeney – Janney Montgomery Scott, LLC

Related to that the talk in the industry at least in some of the larger I guess theoretically more macro exposed publically traded retailers is about inflation and deflation and what impact that has on the industry. It occurs to me there is for A&P specifically there is a lot of company specific issues that sort of make that maybe less of a focus on these calls but what impact do you think deflation and I am specifically referring to commodity deflation and its tendency to cause competitors to re-hit hot price points on things like milk, bananas and ground beef, has been having on your business over the past 3-4 quarters and what is going on right now? Could we expect a return of inflation to have a positive impact on gross profit dollars for you?

Ron Marshall

It was very insightful for you to point out there are really two separate components in what people measure in inflation. One is commodity price deflation and then retail price deflation that follows in the downturn as well. Clearly we have suffered from both. As a practical matter as an organization we are focused on controlling the things we can control. Everybody is playing with the same deck of cards in this market and we think there are real opportunities outside whatever the exogenous factors might be that drive our business. Now as we look into the second, third and fourth quarter I think everyone agrees that there is going to be moderate price inflation, cost inflation in key commodities including packaging driven by oil prices. As a rule, those deflation numbers have been very kind to the grocery business.

Jonathan Feeney – Janney Montgomery Scott, LLC

When you say they have been kind to the grocery business I know forgive me if this is an obvious question but could you just walk me through why you think that is? What is the actual factor that makes inflation and has made inflation in the past so good for retailing?

Ron Marshall

Obviously there are two factors. One is the prices go up.

Jonathan Feeney – Janney Montgomery Scott, LLC

It has to be over and above what you pay. I guess that is what I am getting at.

Ron Marshall

Generally we operate on a gross margin run rate and as we maintain those rates it increases gross margin dollars.

Operator

The next question comes from the line of Colleen Burns – Oppenheimer & Co.

Colleen Burns – Oppenheimer & Co.

First on the top line can you give any color around maybe which format saw the weakest performance and which formats saw better performance? Was it price impact? Fresh?

Ron Marshall

While both our legacy and our price impact formats had challenges during the quarter it is clearly differentiated because our Food Emporium business in New York just had a phenomenal year. Had a great year. Our Food Basics business which we don’t talk a lot about but as we look forward into economically challenged neighborhoods, these food deserts and retail deserts in the inner city we think or I think Food Basics is a marvelous opportunity to help fill in those gaps. As we look at our two primary brands, clearly the trend where Pathmark had greater difficulty continued into the fourth quarter. That is solely because I think the erosion of brand identity was more significant in Pathmark than our other brands.

Colleen Burns – Oppenheimer & Co.

Heading into the first quarter I know you commented that sales were a little lumpy. Would you say you saw trends decelerate from the fourth quarter? Holding in at that level or how would you characterize kind of early in the first quarter environment?

Ron Marshall

As I said in my opening remarks it has essentially continued. It is going to take awhile for the initiatives we have in place to gain traction. It is very difficult to anticipate inflection points when there are so many variables involved. So it is difficult to really give you a point where we think this is going to turn but we are doing the right things here.

Colleen Burns – Oppenheimer & Co.

How should we think about in general SG&A in the coming years? It sounds like you are beefing up marketing dollars. Are you expecting generally dollars to be up, down or neutral?

Ron Marshall

We expect them to be neutral or down. This is in large part a reallocation of our advertising spend.

Colleen Burns – Oppenheimer & Co.

Is this kind of run rate of $75-100 million really kind of your maintenance CapEx level?

Ron Marshall

No, over time our maintenance CapEx level is somewhat higher than that. I would say it is somewhere in the 1.75-2% range, expressed as a percentage of sales. As I mentioned in an earlier question I think we have the luxury of having a holiday for the next year or so but at some point in the next 2-3 years we are going to have to return to more normalized maintenance rates.

Colleen Burns – Oppenheimer & Co.

On your dark store cash expenditures for next year what are you expecting the cash input to be for that looking out the next year?

Brenda Galgano

Based on our estimates right now we are estimating approximately $55 million.

Ron Marshall

That is a current run rate number. As I said earlier we are just now picking up tools on this thing and it is a priority to ameliorate this as much as possible.

Colleen Burns – Oppenheimer & Co.

Is your expectation looking out this year to close more stores? Or are we still in the early stages?

Ron Marshall

Again, we look at all of our stores all of the time. I don’t expect any significant announcements. Anything you might see would be just in the context of normal pruning.

Thank you everyone for your time today. We no doubt have our challenges but this company also has significant opportunities. Our sole mission is to make the Great Atlantic and Pacific Tea Company great again. I look forward to reporting back to you next quarter on our progress and have a nice morning and afternoon.

Operator

This concludes today’s conference. You may disconnect at this time.

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Source: The Great Atlantic and Pacific Tea Company F4Q09 (Qtr End 02/27/2010) Earnings Call Transcript

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