Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Krystyna Lack - VP, Treasury Services

Christian Haub - Executive Chairman of the Board

Brenda Galgano - SVP, CFO and Treasurer

Analysts

Karen Short - BMO Capital

Bryan Hunt - Wells Fargo Securities

Susan Anderson - Citi

Carla Casella - JPMorgan

Colleen Burns - Oppenheimer

Mark Williams - Janney Montgomery Scott

Doug Thomas - JET Investment Research

The Great Atlantic & Pacific Tea Company, Inc. (GAP) F1Q10 (Qtr End 06/19/2010) Earnings Call July 23, 2010 11:00 AM ET

Operator

Good morning and 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 Christian Haub, Executive Chairman. Also participating on today's call will be Brenda Galgano, Senior Vice President, Chief Financial Officer and Treasurer.

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

Krystyna Lack

Thank you and good morning. Today's presentation may contain forward-looking statements about the future performance of 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.

The risks and uncertainties related to such statements are detailed in our SEC filings which are available on A&P's website.

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

Christian Haub

Thank you, Krystyna. Hello everyone and welcome to our first quarter conference call. With me today is Brenda Galgano, our CFO.

This morning I'll discuss our new leadership, review the main elements of our comprehensive turnaround strategy and briefly summarize some key developments during the quarter. Brenda will then cover the first quarter results in detail and discuss our financial position and financing activities. And before we take your questions, I will provide a brief summary. Let me begin with the management change.

The Board and I worked very closely over the last several months with our major shareholders to develop a comprehensive turnaround strategy for A&P. As we move to the implementation and execution stage of the turnaround, Ron Burkle and I in conjunction with the Board determined that the company needed a leader at the helm with the skill set that Sam Martin brings to the company.

I am pleased that Sam has agreed to join the company as our President and CEO. Sam is a proven talented executive who has successfully executed operational and revenue-driven turnarounds like this one before. He has a vast array of management experience that encompasses operations, supply chain and merchandizing. These experiences will be extremely valuable to the company.

We are confident that Sam will quickly and successfully implement our turnaround. I'm sure that you will be hearing more from Sam in the upcoming weeks and months.

We are clearly disappointed with our first quarter results, but we are confident that we now have the right leadership in place to drive our comprehensive operational and revenue-driven turnaround to enhance the company's competitive position.

The turnaround is designed to generate sustained profitability and cash flow, drive sales growth, restore competitive margins to the business and strengthen the foundation of the company for the long term.

The four key elements of the turnaround effort are: Now, that we have made our pricing competitive again, we will continue to improve our customer value proposition through more effective merchandizing. We will enhance our customer shopping experience and drive clear brand identity across the key formats.

We will lower structural and operating costs significantly, and we will implement new financing initiatives that augment our first quarter liquidity position of $253 million to address future maturities and the need of our business.

We are putting in place a number of major initiatives to achieve these goals and to make A&P a great company again.

Sam has recently spent time looking at our operations and visiting our stores. He has reviewed our turnaround strategy and strongly agrees with the approach we are taking. As we execute on the turnaround, we expect that he will bring additional valuable insights that enable us to further enhance the customer shopping experience and improve our value proposition and strengthen our merchandizing operations.

As we move forward over coming weeks and months, we will provide an update on our planned progress to all our stakeholders.

And finally, Tengelmann and Yucaipa endorse our strategy and have been and will remain actively involved in our efforts to improve the company's performance. I appreciate their involvement and I'm encouraged by their continued belief in the long-term value of their investment in A&P.

Before talking about our outlook for the remainder of the year and turning the call over to Brenda to review our financials, I'll briefly summarize the first quarter from my perspective.

The 7% decline in first quarter ID sales was below our expectations and was driven primarily by a decline in customer count. Although deflation has mitigated, we don't see signs of any meaningful inflation. Our gross margin decline during the quarter was all driven by the pricing investments we made in our legacy A&P business as well as in Pathmark. Adjusted EBITDA was $19 million, down from $81 million in the year-ago period, reflecting lower sales and our pricing investments.

However, aside from the numbers, I believe we did make some progress over the quarter. The new lower price project in A&P has been fully implemented in all key center store categories. We're seeing some very positive results and we're fine-tuning the program to increase its effectiveness. The next phase of the lower price project has been now launched in the perishable departments.

We have accomplished one of our key objectives of becoming price competitive again in our legacy banners, and the market campaign is doing its job to get the message across to our customers. Project MMX at Pathmark was launched during the middle of the first quarter. So it's too early in the rollout phase.

While we are encouraged by some of the initial customer response, it is still too early to offer a more thorough assessment. Sam will take a close look at the tactical elements of both of these programs to make appropriate adjustments and identify ways to accelerate progress.

Let me now move to the outlook for the second quarter and the remainder of the year. So far in Q2 the trends have improved slightly, which I see as good news in so far that we are not experiencing any further deterioration. We are seeing improvements mostly in our legacy business.

Looking forward to the remainder of the year, we remain steadfastly focused on taking the actions necessary to position A&P for a strong future. I look forward to working with Sam to build out the management team and rapidly implement the turnaround.

And with that I will turn it over to Brenda for her review of the numbers and the financing initiatives.

Brenda Galgano

Thank you Christian, and good morning. Today we reported first quarter sales of $2.6 billion and a loss from continuing operations of $116 million.

Comparable store sales were negative 7.2 for the first quarter, primarily driven by a decline in customer count. Average basket size remained flat.

Excluding the non-operating items of $3 million for the quarter, adjusted EBITDA was $19 million versus $81 million last year. The quarter's non-operating items include non-cash charges of $5 million related to long-lived asset impairments for Pathmark and Super Fresh businesses.

Schedule 4 and 4 of the press release detail the non-operating items for both years.

First quarter ongoing gross margin, excluding a LIFO expense of about $1 million in both years decreased 51 basis points to $29.81. This decline was driven mainly by the following items: Our efforts to become more competitive in our everyday prices in the first quarter as part of our lower price project, a continued shift towards more promotional sales as our customers saw higher value items especially in the Pathmark business, and increased warehousing and trucking rate to sales due to lower sales leverage and fixed cost.

This was partially offset by the elimination of non-productive promotional investments. First quarter adjusted SG&A increased 162 basis points from $30.19 to $31.81 driven primarily by lower sales leverage on fixed costs.

Total store labor increased 88 basis points. Occupancy increased 49 basis points, and advertising increased 14 basis points. Clearly, these results are disappointing, and costs must be reduced while we make the necessary revenue-driven changes to the business.

As Christian discussed in more detail, our turnaround is revenue-centric and it includes a lowering of our structural and operating cost to a level appropriate to the revenues of this company.

Capital spending totaled $20 in the quarter, and depreciation expense was $70 million. This compares to $27 million of capital expenditures during last year's first quarter, and depreciation of $78 million.

Turning to our balance sheet, we entered the quarter with net debt of $1.4 billion, which includes capital leases and real estate liabilities and is net of $17 million of invested cash. With respect to how I think about our equity share count, total outstanding share count is approximately 90 million shares. Using 56 million of the outstanding shares, we add 35 million in convertible preferred shares, plus one million for the in the money stock options, less two million shares still to be returned under the share lending agreement.

For the quarter, free cash flow was -$51 million consisting of the adjusted EBITDA of $19 million offset by net cash interest and dividends paid of $50 million and CapEx of $20 million. The $98 million increase in net debt from last quarter resulted from the following: the negative free cash flow of $1 million; payments against dark store liability of approximately $18 million; and net seasonal working capital changes and other of $29 million, which includes severance payments, annual contributions to benefit plans, annual insurance payments, and payouts of old self insurance claims previously accrued.

Liquidity at the end of the quarter was approximately $253 million, comprised of $183 million of availability under our credit agreement and short term investments of $70 million. Outstanding loans totaled $133 million, and letters of credit totaled $201 million. As of the end of the quarter, we had a tax net operating loss carry forward of $774 million to offset future taxable profits, including operating profits and capital gains.

We continue to assess our liquidity position in light of our 2011 debt maturities and our focus on cash generating initiatives. In addition to our revenue generation and cost reduction initiatives, we are undertaking a number of capital raising efforts. This includes incremental financing through our current bank facility utilizing our over-collateralized asset base, sales leaseback transactions, and the sale certain non-core assets.

We expect transactions such as these to improve liquidity, giving us the necessary runway to implement our turnaround and address our 2011 maturities.

I will now turn the call back to Christian.

Christian Haub

Thank you, Brenda. I want to close with a brief summary of our key priorities going forward.

We clearly have a lot of work to do, but the Board, Tengelmann, Yucaipa, and I are confident that under Sam's leadership we have developed the right approach to position the company to generate sustained profitability and cash flow, restore competitive margins to our business and strengthen the foundation of the company for the long term.

This turnaround will be operational and revenue-driven, complemented by significantly lower structural and operating costs. We are confident that we will successfully augment our current liquidity to deal with our maturities and support the turnaround financially.

A few words about our employees. They have been working very hard during these challenging times while remaining focused on delighting our customers in every way. I am encouraged by their continued loyalty, as we work together to build a brighter future for our company.

This concludes our presentation part, and we are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from Karen Short of BMO Capital.

Karen Short - BMO Capital

A couple of things. Not really sure where to start here, but I guess the first thing I want to focus on a little bit is, you had 7%, call it traffic declines in the quarter, even with the price investments that you've made. It seems to sound like you're not really going to change your strategy too much. It sounds like from the things that have been implemented into the back of the fourth quarter, it will remain in place.

So I guess the first thing is, what gives you comfort that you're going to get this traffic back, because you haven't, with the price investments having already been made. Is the new CEO onboard with your turnaround, because my guess is he wasn't involved in developing it?

Christian Haub

Let's go to the second part first. Sam has had an opportunity to look at our turnaround strategy and the direction and the big things that need to happen, and certainly believes that we're on the right track there. But in order to sustain a turnaround, we obviously need to get traction on top-line and on margin, and really on the operations of the business. And there's more work to be done there.

And I don't think we were inferring that the work that has been done to date is going to be enough to accomplish that. And I can understand your perspective from the first quarter results that a lot more has to change. And we haven't gotten the response to some of the actions we've taken as quickly as we might have liked. But we do see underneath the pure numbers some real progress.

And particularly on the legacy side of the business, there are certain categories that we've made price investments, where we have seen a very significant uplift in units for example, and that is continuing into the second quarter. And actually traffic has improved already during the first part of the second quarter, particularly in the legacy business.

But there's a lot more work to be done. And I don't think we want to say that this is the only thing that is going to drive this turnaround, even on an operational basis. There's a lot more we can do with assortments, with customer service, with in-stock and all of those things.

And I think Sam has a very good perspective of where we are today and where he envisions our stores have to be to drive this turnaround. And I'm sure he will communicate that over the next few weeks and months when he addresses the shareholders and the investors in the near term.

Karen Short - BMO Capital

So can we maybe just talk about liquidity a little bit more? I mean, when I take a run rate on EBITDA, and I guess I'm sure you hope as much as everyone else does that your run rate improves. But we take where you're at on EBITDA now, and I kind of do some math on where I think EBITDA would end up for the year, I mean your EBITDA doesn't cover your cash interest, let alone CapEx and things like that.

I guess Brenda, you went through the $253 million, but if I do the math on where you kind of end up, you're going to need more than sale-leasebacks and non-core asset sales.

Christian Haub

And I think we understand that and we are focused on all the things that we need to do to raise financings to cover the needs of the business, and to address the maturities that we have. And there's a very good effort underway. And I'm very encouraged by the progress on all of these different initiatives and the support of our lenders and our bank group. And we are confident that if we execute all these things, that we will be fine.

Brenda Galgano

Karen, in addition to the sales in non-core assets and the sale leasebacks, I also referred to a pending incremental financing through our current bank facility. Currently, the borrowing base under that facility is a little bit over $500 million, and the value of the collateral under that facility is hundreds of millions higher than that and it's in excess of $900 million.

So there's strong investor interest in some additional financing there. So that is something that we are seriously pursuing at the moment.

Karen Short - BMO Capital

Okay. Then just lastly, it's my understanding that you guys hired Jay Alix and Partners. Maybe you can elaborate on it a little bit, on what their role is.

Christian Haub

We have been working with AlixPartners on and off for several years. We brought them in to work on some of the turnaround initiatives, And so they've been working with us on that and have been focused on making sure we are looking at all the right things and bring some additional perspective to some of the opportunities that we might have not considered in terms of accelerating the turnaround, and some of the structural changes that we are considering.

Karen Short - BMO Capital

So were they involved in developing the turnaround plan that Ron started to attempt to implement?

Christian Haub

They've been involved in specific initiatives of the turnaround plan, and that's been their role.

Karen Short - BMO Capital

Okay. And then, sorry, last question. If you guys do some sale-leasebacks, can you give me some sense of what you think you could generate in proceeds? And then can you just talk about how that would change the borrowing base?

Brenda Galgano

Sure. The owned real estate is currently collateral under our credit facility. The total value is in the $175 million range. So total proceeds, I would expect given the work underway currently could exceed a $100 million. And because we don't get full value for the real estate under our facility, the net liquidity improvement on approximately $100 million proceeds would be approximately $50 million. So it's about 50%.

Karen Short - BMO Capital

And then do you have a sense then for timing on this?

Brenda Galgano

Typically through due diligence to close the process would take two to three months.

Karen Short - BMO Capital

And that would involve all of the remaining owned stores?

Brenda Galgano

Well, we would not necessarily do one transaction that would encompass all of the stores. We have a bidding process, and depending on the bids in some cases, it's one store or could be a few stores. But we would, if there's an opportunity to gain significant value through any of those owned stores, yes, it could be all.

Karen Short - BMO Capital

And then on your vendors, I mean I know a vast majority of the credit is through C&S, but can you maybe elaborate a little bit on how your vendors are feeling in terms of the (DFD) ones? Because I would imagine they would be a little nervous right now.

Christian Haub

We have regular dialogue with all of our vendors. And that hasn't changed, and we don't foresee any of that changing. They are focused on how they can play a role in the turnaround of the business, and how they can build their business. And we communicate to them what we're working on and the progress we're making in the business. And so, this has been a very collaborative and supportive ongoing relationship.

Operator

Our next question comes from Bryan Hunt of Wells Fargo Securities.

Bryan Hunt - Wells Fargo Securities

I was wondering if you could just talk about the price investments that were made in the center of the store in phase one? And what you're doing in phase two? And what the percentage impact is to your basket in your opinion?

Christian Haub

I don't know if I have all those details, but the idea was to make the key center store categories more competitive from an everyday price perspective, but then obviously, offset that with also the promotional investment that would typically happen in those types of situations. And obviously of course we're looking at making prices competitive with key competitors by market.

And a market sometimes can be just a couple of stores that are competing with a number of other stores in the different price zones that we have. And then, obviously communicate that message to the consumer and see how the movement then changes. And ideally you would like to put a program together like that that does ultimately cost neutral.

But in the beginning, you take the prices down and you communicate to the consumer, and it takes a while to be recognized and then for the volume to start materializing. And as I said, some categories have exceeded our expectations, but some categories have not yet picked up the kind of volume that we have been anticipating. So at this point we're still in the, what you would consider the investment phase.

But we were encouraged enough by the progress that was realized to move this into also the perishable departments. A part of that was also a part of the seasonal change in summer months as there is a greater focus on your perishable departments, particularly in meat and produce. And so, very similarly, even you analyze all your key commodities, you do your price comparisons to all your key competitors and you define the range of where you need to be on an everyday basis and then again complement that with your promotional program.

And I think on the legacy side of the business, we've really made great progress in closing the gap and putting ourselves into a very competitive position again.

Bryan Hunt - Wells Fargo Securities

Would you say you are on top of, or within a couple of a percent of your closest competitors in those key markets?

Christian Haub

Yes, absolutely. Now we are.

Bryan Hunt - Wells Fargo Securities

And then Brenda, if I look at the covenants and the senior secured notes, what is your maximum permitted debt you can run the ABL facility to? Is it in the ballpark of 775?

Brenda Galgano

That's right.

Bryan Hunt - Wells Fargo Securities

Currently you are at 655?

Brenda Galgano

Correct. And our volume base is a little bit over 500.

Bryan Hunt - Wells Fargo Securities

Also, on the covenants, what's your ability to refi the existing notes with obligations that are pari to the existing senior secureds?

Brenda Galgano

I suppose $75 million.

Bryan Hunt - Wells Fargo Securities

That's the only amount of pari debt you can add to the second lien notes?

Brenda Galgano

Correct.

Operator

Our next question comes from Susan Anderson of Citi.

Susan Anderson - Citi

So I wanted to get a little bit more details on the price investments. Last quarter you had talked about them being margin-neutral, and it seems like that wasn't necessarily the case. I don't know if you can go over kind of like what's changed from back then to now?

Christian Haub

Yes, I think that's correct. That was the original intent, I think part is that overall, we have to see the volume list and therefore the beneficial sales impact that wasn't anticipated at the time of implementing that program. I think that would be probably the main driver.

I think from a competitive point of view, we achieved the kind of position that we wanted to achieve and it didn't create too much of an adverse reaction in the marketplace.

And I think influencing consumer behavior is a challenge in this environment. But how can we ascribe that to consumers being reluctant of changing their shopping behavior. And quite frankly, I think we have to do more at retail in other areas, not just price to improve the shopping experience and improve the value proposition which is not all about price.

And so I think there is more work to be done to augment and complement that. And that's part of our plans going forward.

Susan Anderson - Citi

So are you tweaking the price investment to make them more effective or do you think it's more about improving the shopping experience to get the traffic?

Christian Haub

I think we will have to learn from all the experiences, again, some categories respond extremely well. Some categories are lagging. We're in the process of understanding why that is the case, and if we need to alter our approach in some of those categories and obviously apply that going forward.

Susan Anderson - Citi

Then just in terms of like the Pathmark price investments, would you say that you are all the way there or you still have more to go and maybe it's kind of like what's your goal versus competitors?

Christian Haub

We're not all the way there yet. That started later than the lower price project in our legacy banners. So that is still in the roll-out phase, but that was not just all about price, that was a lot of merchandising or assortment changes. And presentation changes, display changes.

We are going to introduce a price entry line of private label in the Pathmark business during the second quarter, which is a key gap that we didn't have, which we think is essential to the offering of what Pathmark wants to stand for.

So there is plenty of more work to be done in the Pathmark side. And again, also there we need to look at overall value proposition, the customer service, the store standard, the in-stock conditions. And I think that's more blocking and tackling to work on as well.

Susan Anderson - Citi

So then what percent of project MMX would you say has been implemented? And have you guys categorized the stores yet into the four categories based on demographics?

Christian Haub

Yes, that work has been completed.

Susan Anderson - Citi

Okay. And then has your merchandising been changed as a result?

Christian Haub

It has, but not at all stores yet, and not in all four of the categories. I can't give you kind of precise enough percentage of how much of that project has been completed. So I don't want to speculate, but clearly there is work going on and continuing as we speak.

Susan Anderson - Citi

Okay. And then just really quick, if you can give us an update on the supply chain initiatives? I think you talked about developing a more optimal network in working with C&S?

Christian Haub

Yes.

Susan Anderson - Citi

How has I guess their response been to kind of amending the current agreement? Any progress made on that?

Christian Haub

We've completed the analysis phase of what the optimal supply chain should look like and therefore what benefits would be attached to that in terms of moving there. And I think we have reached agreement of principle with C&S in terms of what the optimal supply chain would look like. And we're now working on improvement we can make that do not require contractual changes.

But there is an understanding and willingness on both sides to make changes to the agreement that will be beneficial to both us and C&S.

Susan Anderson - Citi

And then just really quick on the revolver, there wasn't an existing incremental built into the terms, right? You have to get investor interest to maybe amend or even extend it?

Brenda Galgano

We would require an amendment, not necessarily an extension, but we would require an amendment, yes.

Operator

Our next question comes from Carla Casella of JPMorgan.

Carla Casella - JPMorgan

You mentioned the borrowing base is a little over $500 million and that you could take your max ABL up to $775 million. What additional assets could you add to the borrowing base?

Brenda Galgano

I referenced earlier to the total value of the assets as collateral under the ABL of a little bit over $900 million. In addition to that, we have other assets such as the value of our A&P withhold, which is not included in that, which would be another over $100 million of value at a minimum.

Carla Casella - JPMorgan

But the collateral of $900 million, there is only $500 million borrowing base.

Brenda Galgano

Yes, there is a few different things. One is because of the advance rates on some of the collateral. In addition to that, we do have included as collateral in the ABL facility the lease values of the Pathmark Stores, but that is not included in the borrowing base.

Carla Casella - JPMorgan

The assets for sale, are they all stores or is some of that shopping center land?

Brenda Galgano

Many are shopping centers.

Carla Casella - JPMorgan

Have you set the book value of the non-core assets?

Christian Haub

I don't think we have defined at this stage. We're still working through that.

Carla Casella - JPMorgan

And then just lastly on the business front, is there any consideration of either consolidating banners or further segmenting your stores? I know you've done some consolidation in terms of the banners in the past. Would you segment those back out?

Christian Haub

I don't know necessarily we would look at further segmentation. I think if anything we'll be probably interested in greater simplification of the business and resulting from that gain efficiencies in the structure and in costs and operating the business. But we still do believe that the legacy formats and the Pathmark formats are to be further distinguished in their go-to-market approach.

Operator

Our next question comes from Colleen Burns of Oppenheimer.

Colleen Burns - Oppenheimer

Just firstly, as you head into the second quarter, as you talk about still being in investment fees, how should we think about gross margins going forward? Should we expect to see a little bit more deterioration in the second quarter as you continue to make those price investments?

Christian Haub

I don't expect we should see a further deterioration. Again, I'm taking some encouragement from a better and better response in legacy business through the actions we have taken. I think that is still going to be complemented with other things and further refinements. But I would not expect the margin impact from the price investments to increase?

Colleen Burns - Oppenheimer

And then just, Brenda, I am not sure if I heard you correctly. Did you say the sale-leaseback proceeds you' re thinking in the $100 million range?

Brenda Galgano

That's correct.

Colleen Burns - Oppenheimer

And then I guess just lastly, you mentioned about potential non-core asset sales. Would you consider The Food Emporium business to be non-core?

Christian Haub

We're going through a review of all of our assets to determine what is going to be core and what's non-core. And as you can imagine, any of those decisions would have an effect on some key constituents, but we definitely would want to communicate to before we make any of this public.

Colleen Burns - Oppenheimer

How many unencumbered properties do you have currently?

Christian Haub

A dozen.

Brenda Galgano

Yes, I would say around 10 or so.

Colleen Burns - Oppenheimer

Okay. So it's only a small amount.

Brenda Galgano

That's correct.

Operator

Our next question comes from (David Marsh of McMahan Securities).

Unidentified Analyst

Christian, when you spoke on this call a couple of quarters ago, you talked about you thought that there could be as much as about $150 million in expense that might be able to be taken out of this company overall. It looks like year-over-year and if I just look at the SG&A line, you've taken out about $25 million in the first quarter. Do you think that you can get maybe like an incremental $12 million to $15 million in quarterly SG&A out of the business as we roll forward?

Christian Haub

I continue to believe that the company of our size should be able to take costs in a $150 million range out of the business. That's what we're working on. And we will not stop at any particular number, but we will relook at what is the potential we can take costs out in terms of either supply chain or all other areas that we're reviewing. Obviously, there will be a prioritization to get to the biggest opportunities first.

But as part of our turnaround, it's structural cost and it's operating costs, but this all have to be ultimately driven by the operational and the revenue-driven turnaround, because only that will really sustain this turnaround and provide the company with growth potential going forward.

Unidentified Analyst

And just as a follow-up question on the sale-leasebacks, do you think that it could generate about $100 million of proceeds? What do you think the incremental recurring lease expense as a result of those transactions would be when you think about that?

Brenda Galgano

On total proceeds for about $100 million, it would be around $10 million, maybe a little less.

Operator

Our next question comes from Jonathan Feeney of Janney Montgomery Scott.

Mark Williams - Janney Montgomery Scott

This is Mark Williams for Jonathan Feeney. Last quarter, you guys talked about $20 million in annualized cost reduction coming out from labor rationalization. Does that go away now with the planned revenue generation initiatives?

Christian Haub

No. That has been implemented and is being realized as we speak.

Mark Williams - Janney Montgomery Scott

And what are the dark store costs? Do you expect those to be $55 million still?

Brenda Galgano

That's correct; however, we have undertaken some initiatives to reduce that liability. So we have some expectations that that $55 million would come down over the year.

Mark Williams - Janney Montgomery Scott

Christian, I think you said on the call that first quarter was trending like Q4. So what caused the drop-off to 7% from 5%?

Christian Haub

Our results got worse during the middle and latter part of the quarter, and that's where we ended up in the quarter. And again, we've seen some improvement from these levels, but it's still a significantly negative number.

Operator

Our next question comes from (inaudible) of Credit Suisse.

Unidentified Analyst

I just have a few questions. I don't know if you've covered this already. But on the customer count decrease, can you provide us with a sense of what that decline looks like over the rest of the store base, in other words, were there some assets that were significantly more negative than others? Or was there a large difference between the legacy and the Pathmark stores?

Christian Haub

We've seen worst trends in the Pathmark business that we did in the legacy business. But that's been kind of the case for a while. So Pathmark is the bigger challenge for us from that perspective.

Unidentified Analyst

Can you give us a sense of (inaudible)?

Christian Haub

No, we don't typically break out the numbers between them. But once what you see I think our segment results for the Q. We think the main driver has been the change in customer count or for the sales change.

Brenda Galgano

The basket size has been relatively flat on both sides of the business.

Unidentified Analyst

And then on the competitive environment, can you give us a sense of how that has changed over the last few months or really over the last few years? Are you seeing change of the encroachment at the high end or the low end? Or where are you going to get hurt the most?

Christian Haub

Well, in the last few months I don't see any significant changes in the competitive environment. Obviously, if you go over a longer period of time, of course the industry becomes more competitive when the economy suffers and the consumer generally becomes more and more price sensitive. But I think we've experience that and I haven't seen any significant change one way or the other in recent months.

Unidentified Analyst

And you haven't seen any significant change in terms of store openings by competitors over the last few years as they continue to expand their own footprint?

Christian Haub

One benefit of a significant recession like we just went through is that everybody has slowed down their capital spending. And we are seeing store openings that were committed to many years ago. As you know in the northeast it takes much longer to get permits for new stores. And these stores were in the pipeline, but we haven't seen any significant increase in terms of competitive capital activity.

Unidentified Analyst

I also wanted to ask just on the capital rates and activities, you talked about the non-core asset sales and maybe increasing the revolver and cap and sale-leasebacks. Any discussion of additional capital from existing constituents or new capital that would come junior in the capital structure rather than senior?

Christian Haub

Well, I don't think we are ruling out any options that make sense for the company in the long term. And certainly our two key shareholders continue to support the company and are working closely with the company in terms of not only the operational turnaround but also the capital structure and the refinancing opportunities.

Operator

We will take our last question from Doug Thomas of JET Investment Research.

Doug Thomas - JET Investment Research

Just a quick question. Would it be fair to assume that Mr. Marshall wasn't comfortable with the strategic plan that you had proposed? And I guess the follow-up would be that I think a lot of us had assumed that he was a choice of Yucaipa's, as well as your own, and that he would have been therefore more amenable to administering the plan that you had talked about prior to his coming onboard. Is that not a fair assessment?

Christian Haub

I would just want to repeat what I said earlier. The Board and Mr. Burkle and I concluded as we were working through the turnaround strategy that we needed a skill set that we think Sam Martin brings to the company. And this strategy for a turnaround needs to be as much driven by improvements in the operations as it is going to be complemented by the structural changes and the cost changes that we needed to do. So that's what has driven the decision process, and that's where we are today.

Doug Thomas - JET Investment Research

But Christian, can I ask you a broader question, and that is, we've been at this now for some time, and EDLP doesn't seem to be working for anybody, as far as I can see. How much further do we have to move down this road before you and others, it's not just A&P, but others reevaluate what's really going on out there? And it doesn't seem to be contributing to anybody's top or bottom line at this point.

Christian Haub

I wouldn't characterize that our approach is EDLP. We looked at our price competitiveness, including our promotional approach. And we are still a high/low operator and we have no intentions to move to an EDLP type of approach. But there is clearly some tweaking going on and some rebalancing between shelf pricing and promotional spending and things like that. But I don't see our approach to be solely EDLP.

Doug Thomas - JET Investment Research

No. And I'm sorry. I meant just on the low end. But again, in this environment I think many of us had had a little bit more optimism that the ability to compete with the Pathmark franchise, that this would be a perfect environment in which for you to succeed with that brand. And so the fact that you had talked I think on the last call about expanding on the lower end more than the high end, and I'm just wondering how long you would think about pursuing that before maybe switching directions and moving a different way.

Christian Haub

Yes. And I don't know if we are ready to get into those kind of discussions at this point. And I think there more to it than just what the pricing strategy is and the positioning towards the consumer, and maybe in the past there was too much focus on that and not enough focus on lots of the other elements that ultimately make a grocery store successful with the consumer. And we've lost a lot of the elements that made Pathmark successful in the past that we need to either bring back in some way or fix and approve. And I think then we can determine if there is a strategic repositioning necessary for that business.

Christian Haub

Does that conclude our questions? I think it does. And so we thank you for your active participation today. And as I've said earlier, sure, you will hear from Sam Martin over the next few weeks and months and we look forward to talk to you again soon. Thank you very much.

Operator

And this does conclude today's conference call. We thank you for your participation, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Great Atlantic & Pacific Tea Company, Inc. F1Q10 (Qtr End 06/19/2010) Earnings Call Transcript
This Transcript
All Transcripts