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Executives

Sam Martin - President & Chief Executive Officer

Jake Brace - Chief Administrative Officer.

Christian Haub - Executive Chairman

Krystyna Lack - Vice President of Treasury Services

Analysts

Jonathan Feeney - Janney Montgomery Scott

Carla Casella - JPMorgan

Byan Hunt - Wells Fargo Securities

Karen Short - BMO Capital

Joe Stauff - Susquehanna

Emily Shanks - Barclays Capital

Susan Anderson - Citi

Presentation

The Great Atlantic & Pacific Tea Company (GAP) F2Q10 Earnings Call October 22, 2010 9:00 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.

Sharing today's call will be Christian Haub, Executive Chairman. Also participating on today's call will be Sam Martin, President and CEO, and Jake Brace, Chief Administrative Officer.

I would now like to introduce Krystyna Lack, Vice President of 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 statement 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.

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 second quarter earnings report. I’m pleased to have, with me today Sam Martin, our President and Chief Executive Officer, and Jake Brace, our Chief Administrative Officer.

Sam will provide an overview of our progress on implementing the turn around plan that we announced in late July. Jake will discuss our financial performance during the second quarter and key actions we are taking to strengthen and liquidity and reduce costs.

Since joining A&P three months ago, Sam has taken swift action to move our company forward in implementing our turn around plan. He has put in place a strong executive management team with the experience necessary to drive our turn around. Sam will give more color on some of the specific actions that we took during the second quarter and described our priorities for the third quarter.

The Board of Directors and I are confident that under Sam’s leadership we have the right team and place to execute our turn around plan and bring about solid results at A&P.

With that, I’ll turn the call over to Sam.

Sam Martin

Thank you Christian and good morning everyone. I’m pleased to be joining you this morning and look forward to getting to know you over the coming weeks and months. Our turn around strategy is comprehensive it entail strengthening liquidity, reducing and replacing structural and operating costs and enhancing the value and shopping experience we provided to our customers.

This involves the significant shift in our corporate culture to accomplish. The initial phase in this strategy is embodied in our new management team, whose talent, experience and energy will help transform A&P into a selling culture with focused discipline and accountability. This new culture is necessary to deliver the performance, our customers and shareholders expect from us. The result of this plan are beginning to materialize and we’ll continue to grow and magnitude throughout the second half of 2010 and into 2011 and 2012.

As Christian said we are moving quickly to implement the comprehensive turnaround strategy for our company. Our plan consists of five key elements, our building blocks is I would like to call them. First, installing a strong management team, second, strengthening liquidity, third, reducing our structural and operating costs, fourth, improving our value proposition for our customers, and fifth, above all enhancing our customer’s experience in our stores.

Now let’s look at each of the five building blocks in more detail. As Christian mentioned, I’m pleased that we been able to put in place a strong management team with the precise mix of experience the company needs at this time. I can say we’re confident that this new team has an urgent and underlining focus on quickly executing our turnaround. In fact they have already demonstrated an ability to work as one team to make the necessary changes to strengthen the foundation of the company.

Let me talk briefly about the talented members of this team. Jake Brace, who you’ll hear from, later in the call, our Chief Administrative Officer, is overseeing the finance and accounting, real estate and information systems departments. It brings 25 years of strategic and financial expertise and successful turnaround and operational experience, having served as EVP and CFO as well as Chief Restructuring Officer of United Airlines.

Tom O'Boyle, EVP of Merchandising and Marketing is leading our Merchandising, Marketing, Supply & Logistics Departments. One of his top priorities is to develop synergy among these three critical functions. He is the ideal executive for this task with more than 25 years of retail experience in merchandising and marketing at Jewel Foods, Albertson's and Sears. Paul Hertz, EVP of operations is leading our field operations. Paul brings more than 20 years of senior retail sales management and operations experience to A&P and has held senior post at OfficeMax, Wild Oats, ShopKo and Fred Meyer.

Carter Knox is this SVP of Human Resources in Communications. He brings his extensive expertise to leadership of our Human Resource labor relations in Enterprise, Communications departments. He is our Senior HR Communication Management positions in retail for more than 30 years at OfficeMax and Fred Meyer.

And Chris McGarry, Senior Vice President and General Counsel has overseen A&P’s legal services and risk management areas for five years. He has previously held General Counsel and other related executive positions with The Grand Union Company, Tibbett & Britten Group and Exel.

Over the coming months you will be hearing more about this deeply experienced team and the progress for making and implementing our turnaround. Our second building block is strengthening liquidity; additional liquidity gives the company time for the changes we’re making to have the intended impact. We made progress on strengthening liquidity during the quarter, which Jake will discuss a bit later in today’s call.

The fact is we’re bringing comprehensive change to this company to all facets of the organization. These are significant and substantive changes and realistically they will take sometime to produce the improved financial results we’re all looking for. But there should be no doubt with this management team with the board’s support is moving with urgency.

Our third building is reducing our structural and operating cost. During our second quarter we initiated a detailed review of our store footprint and made the decision to close 25 stores across five states. These stores include locations in close proximity to other stores, those facing real-estate and cost issues and under performing non-core stores. We expect to wind down operations at the effective stores by the 1 of November.

We’ve also taken steps to lower our general and administrative cost and approve the efficiency within our corporate headquarters. We reduced the headcounts saving roughly $10 million annually in addition we have other G&A underway, targeting an overall G&A reduction of approximately $40 million per year. We also completed Phase1 of a talent assessment of our associates, which has helped us to both flatten the organization and make it more efficient.

Our first building block is improving our value proposition for our customers. We are working on many fronts to drive loyalty and engage new customers. Our goal is to enhance the value we offer them while they shop with us, that means greater attention to details like the right product mix, the right pricing and promotion and effective efforts and the store level and at headquarters, to improve the way we care for and serve our customers. By enhancing and expanding our private label brands identity to America’s Choice, Food Basics and the Food Emporium Trading Company, we are offering customers additional value and variety.

By continuing to enhance and provide visibility and value for our customers through our lower price projects, we’re delivering a more relevant product assortment and more competitive pricing. By utilizing the results of our training and development assessments of our associates we’re lining the merchandising and operational initiatives to allow us to react more quickly to the market and to our customer’s needs.

By flattening our organization we are able to streamline communication channels restores to improved performance and build a culture of accountability. And by analyzing customer data to our loyalty card we are providing with offers that are timely and targeted to their specific shopping needs.

And our fifth building block, is enhancing our customers experience in our stores. Now that we’ve completed Phase 1 of the talent development assessment, we begin to move forward the serious of associate training initiatives designed to improve the overall customer experience across to all stores.

We are also taking our analysis, planning and customer engagement to a new level to help us deliver at better in-store experience. By identifying out target customer segments and using data analysis of our loyalty card shoppers to help us offer the most relevant assortment and value. And we are augmenting the in-store customer experience with both traditional and new medium marketing tools. Extending individualized offers and making the shopping experience more personal.

I’d also like to touch on some other accomplishments in the quarter. In addition, to our progress on the turnaround plan this quarter, we’ve also completed several new store initiatives that enhanced the customer experience. In September, we open a new A&P store in New Providence, New Jersey. This story features a wide selection of fresh and gourmet foods, a full service bakery and a floral department. We also launched grand reopenings for two remodel stores, an A&P in Woodcliff Lake, New Jersey, and a Pathmark store in Edgewater, New Jersey. Both stores offer refreshed assortment and décor to better please our shoppers.

Now, I’d like to touch on key priorities to the third quarter. In the third quarter, we’ll remain focused on strengthening liquidity and enhancing our customer value propositions. We will also move ahead with our immediate priorities in the area of merchandising and marketing including customer relevant seasonal holiday programs completed with personalized offers as well as an expansion of our brands.

We will expand our initial progress with our operating partners to further reduce structural and operating costs. And we’ll further leverage the training and development initiatives that are already under way to help our associates improve the in-store experience for shoppers.

As we arm our team with the necessary training, we will also set high expectations for the discipline and accountability that takes to drive results. We realize this is the significant change and it will sometime to fully complete. Our associates, management team, board and major shareholders are united in the mission at hand. On behalf of A&P, I would like to thank all of these core constituents for their loyalty and continued support. Now I’ll turn the call over to Jake to discuss our business from a financial perspective.

Jake Brace

Thanks Sam and good morning everyone. In addition to our financial results for the past quarter also provide some detail on two of the pillars of our turnaround plan, first, being strengthening liquidity and second, reducing our structural and operating cost. Before I do that, let me share the financial results for the quarter, the key results are as follows, sales were $1.9 billion, down from $2.1 billion last year, comparable store sales, decreased 6.6%, year-over-year. Excluding certain non-cash and non-operating items which are detailed and scheduled three and four of the press release, EBITDA was $8 million compared with $65 million last year.

Second quarter ongoing gross margin decreased 86 basis points to 29.37%. Approximately half of the decrease is price related, driven by our efforts to become more competitive in our everyday prices and also a continued shift towards more promotional sales, as our customer saw higher value items, especially in our Pathmark stores. The remainder of the decrease is due to warehousing and trucking cost resulting from lower sale leverage on fixed cost. Second quarter adjusted SG&A increased by 175 basis points from 29.90% to 31.65%.

Again driven mainly by lower sales leverage on fixed cost at the 175 basis point increase, total store labor accounted for about a 100 basis points and occupancy for about 50. For the quarter, net debt increased $72 million, reflecting that your cash flow for the quarter, the cash flow details are adjusted EBITDA was positive $8 million, but this EBITDA was offset by net cash interest of $38 million, CapEx of $23 million, payments against dark store of liability of about $9 million and other working capital changes of $10 million.

At the end of the quarter availability under our credit agreement with $181 million, outstanding loans totaled to $134 million and letters-of-credit were $198 million. Clearly, we need to do much better and the focus of our turnaround plan is that significantly improve these financial results or if we make some progress in the quarter, we only had Sam since July and rest of the new management team for even shorter time. So we haven’t yet see the kind of positive change in our financial results that were looking to deliver. Now let me change gears a little bit and talk about the turnaround plan, the first thing I am going to talk about is enhancing our liquidity.

We are currently negotiating an agreement with our existing banks and several new lenders to add a new money term loan to our existing asset back facility. The new term loan is expected to be backed primarily by leasehold assets and other collateral not currently contained in the borrowing base. This complex in real-estate intense of structure of the new loan has pushed the closing off for several weeks. We believe however, that we will be able to close and fund the transaction before too long. When we do close and fund the transaction, this loan will contribute a significant amount of liquidity and provide us the time necessary to make the needed changes to our business.

In early September, as part of our effort to realign our footprint with our business strategy, we also announced the sale of seven non-core stores in Connecticut. We expect to close this transaction by the 1st of November. We’re also looking at several other ways to improve our liquidity including sale of additional non-core stores, certain sale leaseback transactions and other real-estate activities.

Another very important component of our turnaround plan is the reduction of our structural and operating cost, our work in this area is focused on four main areas. Optimizeing our store footprint, reducing supply and logistics cost, reducing labor costs and reducing costs associated with general and administrative expenses.

And the first point, we are optimizing our store footprint which Sam and I mentioned before as I mentioned we sold seven underperforming stores in Connecticut. In addition, we closed 25 more stores across five states; we are continuing with our efforts to shut underperforming assets.

Secondly, we are reducing our structural and operating cost in the supply logistics area. These costs are significantly higher than they should be for our company our size with our concentrated footprint. We think there is an opportunity to benefit our margin by about 100 basis points and we’re working closely with our supply chain providers to structurally reduce those costs and we do believe we can achieve significant savings in this area.

The third area I mentioned, labor costs, we are working on reducing our labor costs as well, our unions have been great partners with us for many years, an important part of the A&P family. And we know that we all share a mutual interest in our success for many years to come.

However, to fully implement the turnaround plan we do need to lower our operating costs, that’s why we begun to engage our labor partners in discussions. Lowering these costs will help us change what has been a shrinking a footprint into a stable footprint. And it’s only with a stable footprint at the starting point that we will be able to eventually grow that footprint in a strategic and sustainable way. We believe these goals are shared with all of our stakeholders including our labor, non-labor associates and supply chain vendors.

Four, as Sam and I mentioned before, we are working to reduce our costs associated with general administrative expenses. We implement changes to flatten our organization, which were resolved in $10 million of annual salary savings. In addition, we are reducing our spending for marketing IT and other overhead areas. I’ll hold our numerous G&A initiatives when implemented will generate savings of about $40 million per year.

In summary, we have a talented team in place, and we have comprehensive plan. As Sam pointed out, we have taken many actions to improve our value proposition for customers and enhance their experience in the stores for the second quarter financial results were not good. We have seen positive changes from our turnaround efforts today and we are confident that we will continue to see progress in the quarters to come.

With that I’ll now turn the call back over to Christian.

Christian Haub

Thank you, Jake. Before we take your questions, let me just briefly summarize. Sam and the new management team are working tirelessly on all fronts to move the company forward as quickly as possible. The board and our major investors are united in our confidents in the turnaround plan. Sam and the team are executing this plan. Now, that we have in place a strong management team, our priorities are clear; strengthen liquidity, reduce our structural and operating cost and prove our value proposition for our customers, and enhance our customers experience in our stores is above all else [Ph] job number one.

While they have as much hard work to do, we are focused on bringing comprehensive and much needed change to A&P.

This concludes our presentation and we are now ready to take your questions. Operator, if you could please proceed.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Carla Casella with JPMorgan.

Carla Casella – JPMorgan

Hi, thanks for taking the question. On the 25 stores that you closed, what is the dark store rent going to be on those stores? And is that netted out of the number that you gave for the $8 million EBITDA improvement from that?

Christian Haub

The answer is, yes

Carla Casella – JPMorgan

So, it is netted out.

Christian Haub

Yes.

Carla Casella – JPMorgan

Is that included in your total dark store rent that you disclosed, or is that not yet in there?

Christian Haub

It’s not in there yet.

Carla Casella – JPMorgan

Okay. Can you tell us the amount of dark store rent for those?

Christian Haub

We can deal with that off-line.

Carla Casella – JPMorgan

Okay. And then, the press recently commented on your option to extend maturity of the converts and/or lower the conversion price. Is this a real option in your view? Is it something you’re looking at?

Jake Brace

This is Jake, by the way. I don’t think we want to talk a lot about what the press might speculate on. Our options are, we’re focused on the turnaround plan that Sam and I described, and that turnaround plan is operationally focused. What we do with those converts is something that we are not talking about right now.

Carla Casella – JPMorgan

Okay, and then on the business front, can you give us a sense for the same-store sales declined, was it pretty consistent across Fresh Gourmet and Pathmark? I am assuming it was more heavily weighted toward the Pathmark, but I wonder if you could give us same-store sales at Fresh and Gourmet.

Sam Martin

This is Sam. Carla, good morning. To characterize the, I guess variance between banners, all banners were negative, certainly ID sales and our Pathmark area were slightly more negative than the others and to the extent that we had any detailed information it would be that Pathmark was probably characterized as the deepest decline with the A&P legacy next and our Gourmet stores, the best of the three, but all negative.

Carla Casella – JPMorgan

And the Pathmark, are you seeing any sequential improvement lesser declines or is it still declined?

Sam Martin

As we progressed -- and again I’ve a short time frame to talk about having been here since July, but I can tell you that in our third quarter most recently, the Pathmark trends have improved from where they were in the second quarter. And actually all --.

Carla Casella – JPMorgan

I will let someone else to ask question. I will get back in queue Thank you.

Sam Martin

Thanks Carla.

Operator

We will take our next question from Jonathan Feeney with Janney Montgomery Scott.

Jonathan Feeney – Janney Montgomery Scott

Good morning. Thanks very much for taking the question.

Jake Brace

Good morning.

Jonathan Feeney – Janney Montgomery Scott

Just a clarification, did I hear right, the 100 basis point of opportunity to improve margin, that’s non labor OG&A, did I hear that right? So 100 basis points like $83 million, what you are thinking?

Jake Brace

In terms of supply and logistics?

Jonathan Feeney – Janney Montgomery Scott

Correct.

Jake Brace

Yes, we think that there is that kind of opportunity out there [Multiple Speakers] number are $100 million.

Jonathan Feeney – Janney Montgomery Scott

I know this is tough to call, but I mean how rapidly can supply and logistics, changes be implemented on that order of magnitude. What will be the target gain for that sort of goal?

Jake Brace

Well I think there are two phases, obviously we first of all have to negotiate, we have a contract with our suppliers right now, we need to undertake that negotiation. So, I can’t predict exactly how long that’s going to take, but you can think about in some several months I would suspect.

And then there are certain change that we need to make to implement those changes, because there will be physical changes to our supply and logistics network and those changes will take longer, but we will be able to get benefits, as soon as we conclude those negotiations and have actually seem some benefits already, but run rate, the full run rate won’t happen until we can make some physical changes to our network.

Jonathan Feeney - Janney Montgomery Scott

Okay, thanks for that. And just as a follow-up, you think about your key partners, C&S Wholesale Grocers and the tenor of those negotiation remain, considering you are very considerable customer there and your financial distress to some extend is their financial distress. With the tenor’s spirit of that relationship right now, how interested are they in kind of helping you going forward, do you think?

Sam Martin

Good morning, Jonathan, this is Sam Martin. I would characterize this is a win-win opportunity, because as we look at what we do with the network, we are operating out of far too many facilities today that strains certainly C&S’s ability to serve us it’s strains our ability to pay for it. So as we can rationalize that footprint, it saves both of us operating costs.

Certainly we participate in the outcome of that. There are other duplications of effort that happened across these distribution facilities, because of – in some ways augmented by the merger that occurred not too long ago and the duplications of effort that are in our contract and in our business, as we wipe these away. These are painless kinds of things. In other words that we don’t need two sets of everything we do or in some cases ten sets of everything we do.

So, I would characterize this as something that’s, we are an open dialogue with the leadership with C&S. We are having favorable positive movement in our dialogue and certainly think that we have a confident path to achieving these savings.

Jonathan Feeney - Janney Montgomery Scott

Thank you. Just one final one Sam, and let me say, for the first time congratulations and welcome. I mean certainly when you look at the numbers and do a sort of peer analysis everything you just said seems to be born out. I mean there seems to be a lot of opportunity to get to efficiency ratios that make sense, even for retailers of similar size in your kinds of geography.

My question would be, do you have experience whether from OfficeMax or some place else. I mean do you feel like you have the experience to do all these things at the same time, I mean chiefly renegotiating some difficult things like dark stores and your aspects to your agreement within C&S Wholesale while implementing this operational improvement, it just seems like even just reading the release today, is a ton to do it once, and can you point to an experience where in the past you’ve seen this sort of thing come together in a reasonable timeframe?

Sam Martin

Yes, absolutely Jonathan. Let me start by saying I’m not here by myself right now, sure of that. I’ve a tremendous team of high skilled professionals working on this with me. We have also a few consultants in the building that are helping us with some of the expertise and some of the lifting and some of the analysis.

But importantly I can speak of the rationalization of distribution that was done at OfficeMax completing merger similar kinds of opportunities that were there and across time, rationalize that supply chain in a significant way, and again utilize the tremendous professional executive there to accomplish these things.

I was personally responsible for the supply chain augmentation and improvement at ShopKo Stores. I’ve seen this done, I’ve done it. I understand how it can happen, and we have a tremendous team of people here to work on all of these other components.

Jake is deeply experienced in negotiating not only union issues, financial issues, but also across IT and real estate so, so deeply seasoned person working on these things.

Our merchant is a deeply seasoned merchant, who has a lot of great experience in terms of moving businesses like the Texas division of Albertson’s, the Jewel-Osco Group in the Chicago area and moving it in forward in a merchandising operating way that takes effect of tremendous marketing efforts and print it on the PNL.

There is a tremendous amount of expertise in our operator in Paul Hertz in terms of his ability to turn stores around, and most recently again at OfficeMax he had tremendous amount of success in creating a shopping environment for customers that is unrivaled in that industry. So, yes, I have a lot of confidence and I have a lot of help to get there and I agree with you there is a lot of works to do.

Jonathan Feeney - Janney Montgomery Scott

Great, well. And then I guess in that this case it’s a good thing. Thank you very much.

Sam Martin

Thanks

Jake Brace

Thank you.

Operator

We will take our next question from Byan Hunt with Wells Fargo Securities.

Byan Hunt -- Wells Fargo Securities

Thank you, and good morning.

Sam Martin

Good morning

Jake Brace

Good morning Brian

Byan Hunt -- Wells Fargo Securities

When you look at your five elements, if you explode in the press release and you talked a good bit about, could you move outside the logistics and the cost of good as well as the G&A opportunities that you described, and there is roughly, it sounds like a $140 million of savings there. And maybe categorically explore and quantify the other opportunities you see on savings, as well as could you balance the savings equation with the price gap that still exist in the company storage relative to its peers?

And where do you feel like, you need to be from a pricing perspective, I’m sorry about all the questions at once. Where do you need to be from a pricing perspective to achieve your targeted value positioning in your mind? And I’ve got a follow-up after that.

Sam Martin

Alright, so let me start with the pricing question, the last you asked. Bryan, this is Sam Martin here. Now, I think you heard my articulation of our merchandising marketing strategy around personalizing what we do in terms of a promotional effort.

And let me clarify that, we think about pricing, we think about all in pricing, not just the everyday shelf price, but certainly the waiting of, and the understanding of an a perspective of our customers in terms of how she proceeds pricing in our store and it’s important to understand that there are far more items that our customer doesn’t really know about pricing. But they’re different by customer segment.

And so as we go forward and we does all out our customer profile, we are going to understand pricing on what categories and what items makes it difference and what customer, and we will be able to selectively, and we have the technology to do this, selectively make offers to people individually, and go about marketing effort that says, we are going to rationalize price for every customer in a different way.

Now that’s not to say, in thousands and thousands of ways, but by sorting customers out by a profile, we will be able to understand what moves the needle. Right now, we have taken approach of lowering across the board, pricing to get our overall GAAP pricing much more similar and much closer to our competition. That has proven to be a successful first step, but we certainly need to be more customer focused on how we think about pricing.

Look, we’ve -- the culture of our company is been one of really working from the vendor side, not from the customer side. Our focus has been inward and not outward. So as we go forward, we are going to be really much more in tune with what the customers in this marketplace need, want and value and respond to that in a way that makes us their first choice.

Byan Hunt -- Wells Fargo Securities

And so, you think you are there on holistic price cuts and on a go forward basis, it’s really about individual promotion. I mean, I am just trying to reiterate what you said to sum it up. Is that fair?

Sam Martin

Yes, I would say we don’t see a need at this point in time to make another holistic cut in pricing, the investment we made in pricing in the first part for this year, certainly I wasn’t a party to that decision, but I can see what the results of that have been and it only get us a portion down the road. In other words, we still have a big perception issue to overcome even though our pricing is much more rationalized than it was earlier.

But yes, I don’t see another big rational, a big step in pricing, no.

Bryan Hunt – Wells Fargo Securities

Okay Sam, and then moving back to the first part of my question, again categorically segmenting the cost opportunities and the savings opportunities either outlined roughly a $140 million. What other opportunities do you see in other line items are departments within in the business and what are those additional savings?

Jake Brace

This is Jake. We are not going to give certain specific numbers for a specific line items or category, but let me try to drive a little bit of a picture here. We talked about where we think we can get supply in logistics; you can figure that number as I said 100 basis point and so then when we look at opportunities in other areas in the business there are, what I’d call through fundamental changes that we get from operating the business better. And that we think is the fundamental improvement, that’s in the same order of magnitude as the supply in logistics.

Then labor that’s a discussion you can put pen to paper, you know what our labor cost are and you can estimate how much we can get out of there, we think there is an opportunity there, we are not going to code a number to you, because we’re going to have those discussions behind closed doors with our unit partners and that’s just the way I can do that, but that’s a significant opportunity as well.

And then the smaller opportunities are in terms of, you identified G&A and we think we can get that up to about $40 million as we said, and than the last thing as we have some other lease restructuring things like that, which we think we can also reducing in about that same amount.

So, are little slightly higher actually, so that hopefully will give you a little bit of a picture without - we are not going to go pin, specific numbers on there at this time, we have only been we only doing this for relatively short amount of time and as we get further along we have further clarity on where the opportunities are. We will put specific numbers on those things.

Bryan Hunt – Wells Fargo Securities

Okay, thank you Jake and Sam, and a last question, your movements don’t happen on static environment, and it sounds like more and more competitions creeping into your core markets, whether it’s Wal-Mart, a Club Store, an ALDI price impact player. Could you talk about maybe one that competitive openings that the company seen in the last year? And to whether the competitive environment has become more egregious in the last quarter or two or is it somewhat stabilized? Thank you for your time.

Sam Martin

Yes, Bryan, thank you as well. Listen this is Sam Martin. Now, my perspective on the competitive marketplaces, it is a competitive market. It continues to be one of the more competitive markets in the country and I’ll tell you that I don’t see it getting more competitive. I certainly don’t see it getting less competitive.

But we’ve got a challenge. We’ve got challenges externally, internally. We’re taking those into account. We’ll look at in our planning now all of the things that we have to face in terms of incoming competition. There’s also some competition leaving some markets. So it’s not all one way. So we do get a few tailwinds here and there from some competitive closings as well as the headwinds we get from openings.

But, I would tell you this, in terms of our abilities in our company and all the way down to category management and store operations, we have been mediocre at best in the recent past. And we have a lot of room to grow in our own, and we’re focused on our own. We’re focused on what we do, how we do it, how we’re accountable for the results and how we’re going to focus on, the customers we have today and the customers we’ve planned to attract in the near and long-term future.

So that’s what our efforts are, that’s what our efforts will continue to be; and as we get better at providing the right customer value proposition and better at the right customer shopping experience, competitive intrusion will become less of an issue.

So, to the extent it’s been an issue in the past, it should become less of an issue as we get better at what we’re doing, there is a lot of room to grow.

Bryan Hunt - Wells Fargo Securities

Thank you.

Sam Martin

Thanks Bryan.

Operator

We will take our next question from Karen Short with BMO Capital

Karen Short – BMO Capital

Hey everyone.

Sam Martin

Good morning Karen.

Karen Short – BMO Capital

So, I just have a couple of easier housekeeping question. I guess, when you talk about the 2Q comp, can you just give us a breakdown of traffic versus basket? And then when you talk about the comp improving in the third quarter, can you decompose that a little bit?

Sam Martin

I’ll start with the third quarter while we gather a few facts for you in terms of basket and whatnot. So, our third quarter comps have steadily improved, since the second quarter close and some for good reason right, so we’ve got what you would consider some aggressive sales being transferred from closed stores, which we knew it would be a benefit.

We have some better marketing in our view. Some better plans being laid, we’re improving our execution in stores even though we have a long road ahead of execution improvements, we have made some progress and it’s starting to show in our comp trends. So, from that’s standpoint we are gaining traction, our third quarter early results, of course we are only into it about six weeks, is showing some nice improvements.

Karen Short – BMO Capital

Okay

Jake Brace

You want the – on the second quarter the comp, so the customer accounts the traffic was down in the range of five and small change of 5.2 or something like that and then the basket size was down about 1.6 and the baskets of decrease was in the item count decrease.

Karen Short – BMO Capital

And if you would exclude in case impact from that, do you have any sense in what your numbers will look like?

Jake Brace

Yes, probably the stuff rate of price impacts and then I don’t have that now.

Karen Short – BMO Capital

Okay. And then looking at the labor opportunity, sorry, can you quantify that in basis points I missed that?

Jake Brace

No you didn’t miss anything. I didn’t quantify that opportunity, that’s something you understand that we’re talking to the unions about that directly and we want to have those conversations in a closed room directly with them, and it’s not something that we really want to publish, I would characterize the opportunity as significant. It is a meaningful opportunity, but I don’t want to pin a number on it. Because just, we just have to add those conversation privately with our unions.

Sam Martin

Yeah and there is obviously three ways to look at this right. We have those things that Jake has referred to in terms of negotiated outcomes, we have ways of doing things that will bring efficiencies to our operation and then we have the effective of turning our sales trend around so that we’re not deleveraging our fixed labor cost, which would improve the rate as well.

So there is, we’re working on all these fronts to improve efficiencies to built sales so we’ve not deleveraging and of course to look for a negotiated opportunities for better outcomes as well.

Karen Short – BMO Capital

Okay and then I guess just turning to liquidity, if I do the math on king of, you revolved that balance what you might generate an EBITDA this year and then we’re taking rate to your cash interest, your CapEx and your dark store leases. I mean obviously by the end of this year, you’re pretty tied on liquidate, I mean not zero, but I mean it’s kind of 45 million does that sound reasonable excluding any additional availability on your revolver asset sales.

Jake Brace

Well, we’re not going to provide any forecast. We haven’t providing guidance for a long, long, long time. But suffice it to say that, liquidity is high on our list of thing to do.

It’s the second phase of our turnaround plan if we getting the team in place, and we’re working very, very hard on that. We think we have some very significant opportunities to improve our liquidities for the, in the ways that I mentioned on the call through expanding our bank facility through sale leasebacks and other transactions related to non-core assets.

And the liquidity is obviously important, because the changes that we’re making will both take some time and, some of them may actually require some investments. And so to accomplish all that, to buy the time and to have the liquidity to make any investments, we need to improve on our liquidity. But we don’t provide any forecast, but we’re feeling very comfortable that we’re going to be able to get to the place where we have the liquidity we need to execute on the rest of the plan.

Karen Short - BMO

And then – just a Gourmet [Ph], I mean it had held in there pretty well. I mean it held in there on sales, but this quarter it seems to have lost a little bit on the EBITDA. I mean given that point on the perceived asset that’s non core, can you maybe just comment a little bit on what was happening in Food Emporium this quarter or Gourmet?

Sam Martin

Well, it’s the city obviously these stores are in the Manhattan. There’s been particular economic pressure as well as other issues around competition. But I think it’s fair to say that the Gourmet group has held up relative well comparatively without a lot of additional, if you will enhancement.

Its status quo or them. They are moving along at a relative clip as we expected them to, and they have some ups and some downs in terms of their performance on EBITDA, some related to direct business issues that we’ve had, some related to external pressures.

But certainly nothing that we’re concerned about, they’re actually also experiencing a better third quarter, and we expect that to be continuing on as we have seen the Gourmet group perform. We’re comfortable with where they’re at. We think they’re in a good place and we think they’re moving in the right direction.

Karen Short - BMO

Okay. Thanks. And last question. I’m just curious, under the terms of the preferred, you guys have preferred, do they have the right to block at asset sale?

Jake Brace

They have the rights to uncertain assets sales to require that [Inaudible].

Karen Short - BMO

And is Food Emporium one of those assets?

Sam Martin

I think in terms of the significance of the asset sale that they have, that reaches their level of approval, I can’t comment on today, I am not sure of it, but we can certainly find out what the level is. I have no idea in my mind, where that is, but it’s certainly we are looking through the agreements, we can see it.

Jake Brace

The important thing to understand Karen, is that, the turnaround plan that we developed including all of the aspects that we have described including the liquidity raises and whatnot, has the support of our major shareholders, both Yucaipa and Tengelmann, it was developed in conjunction with them and so, obviously we are not going to dig something into the plan that we don’t think we are going to be able to get done.

Karen Short - BMO

Nice that’s fine. Okay.

Jake Brace

You were in the room while we did all this, and so whatever part of it may or may not require their approval, they were in favor of the plan that we are currently executing.

Karen Short - BMO

Okay. It’s very helpful. Thank you.

Operator

We will take our next question from Joe Stauff with Susquehanna.

Joe Stauff – Susquehanna

Good morning. Thank you. Couple of questions on liquidity. As you indicated, obviously at the end of the quarter, $181 million was available under credit facility. Has that materially change versus today’s?

Jake Brace

We don’t provide updates or projections of our liquidity. Karen was doing that math on the previous question, but liquidity is something that we are really focused on and we are working very hard with our banks and others to enhance our liquidity. So, I can’t comment on where we sit today, but again we are comfortable with our trajectory in terms of everything we are working on and then we have a liquidity we needed to execute on the overall plan.

Joe Stauff – Susquehanna

Okay. And let me ask in other ways then, maybe given, how much debt, I guess do you, estimate you can layer on top of the top of the 11 AAA [Ph], I guess either from a measurement, we are been using the measurement period at the end of quarter.

Jake Brace

I am not sure, I understand your question.

Joe Stauff – Susquehanna

That is how much again, $181 million of availability are there, is there any other collateral that you can pledge on the context of, trying to anticipate how big the new bank facility could be, is that going to replace the entire bank facility now or it’s just going to be an incremental piece? I am not trying to get that.

Jake Brace

Yeah, no, fair enough. So without talking specifics there is, I had mentioned it in my prepared remarks, there is some collateral that’s not currently part of the borrowing base that we think it can be used to, as part of the overall ABL facility to create a another tranche new money term loan as I described that is supported by that collateral.

Now as I mentioned on my prepared remarks as well, the structuring of the that and it’s real estate intensive nature makes it something that is sort of logistically more difficult to do than we initially though, it just takes a lot time to work through all the real estate issues, and that’s what we’re doing.

But as to the size it is a, it's a significant size. I don’t want to pin a number on it, but I can tell you that it’s probably the largest aspect of our liquidity plan.

Joe Stauff – Susquehanna

Okay, and as you suggest I guess in the press release and in your filings, you contemplate printing that by I guess early November, was that fair?

Jake Brace

Well, I don’t think we – I said in my prepared remarks, that’s if we are going to do it before too long, and we think we can do it in weeks not months. So, I think that’s the only way I would characterize it right now.

Joe Stauff – Susquehanna

Okay, and so kind of matching that obviously with sort of the operational metrics that you have. Obviously outside of working capital looks to be you’re burning roughly anywhere between $55 million, $65 million a quarter for the last two quarters roughly, and I guess my question to you is sort of giving the business model in general; how much time, I mean obviously I am trying to ask you a question or trying to anticipate, how much time basically you need relative to the estimated amount of financing that you are going to get in the context of new facility.

That’s a big quarterly loss again relative to your financial position. I guess Sam, what I am asking is how long do you think it will take before all these initiatives, obviously that you have put in place recently in the last couple of months, you think you could start really eating into that quarterly cash burn number?

Sam Martin

Okay. So, my expectation Joe, really is that we started eating into that in this quarter, and so to the extend that we are able to execute on our merchandising marketing initiatives to the extend we can begin some structure, which we have, began some structural cost reductions to the extend that we do have some other liquidity building, if you will initiatives. All of these five, if you will building blocks of our turnaround plan work in concert and have begun.

So there is progress on all five building blocks and certainly to the extend that we see progress, I expect the third quarter should show us progress on this burn rate to the extend that we give any numbers around it or any timing, no. I’m not prepared to do that, and it’s not a practice of this company as been involved in nor do I expect this to get involved in forecasting that kind of number.

But, it certainly is something that will be continuous improvement. So, I would look at it is as not just a definitive point in time, but progress of a program overtime not a project that has a start and end.

Joe Stauff – Susquehanna

Fair enough, I appreciate the commentary. One final please, if I could. All of your store base I’ve see 425 that of the exclusive dark leases. Is there any comment or any visibility you can give us with respect to what percent or what number of the stores are effectively account for a dis-proposition amount of the company’s operational loses.

As we tried to estimate, as you rationalize the store base on a non-core basis, what is the size by anticipated I guess?

Sam Martin

Okay, so let me talk about and characterize it for you like this Joe, the one of the very first things I did when we started working on this turnaround plan was to put some modeling in place to understand what it is about, again we’ve got to keep in perspective what’s going on with that turnaround plan, but if we look across our asset base or portfolio stores, and we characterize the underperforming group we have to understand the implications of all these actions that we’re taking against the timing and the level of underperformance that these stores have, and we build what we could call a watch list of stores that we keep an eye on and we bucket in a few different ways.

So as we make progress on supply and logistics or as we make progress on labor efficiencies or labor cost or whatever component of our plan, you want to talk about, that tide rises all shifts right, so to the extend that some stores didn’t fall off of that watch list they’re no longer an issue. We took the action on the 25 stores, because they were worth more to us close than open, simply put and a number of metrics that apply to that.

As we go forward, I don’t expect that we’ll have another big chunk of stores that will reach that worth more to us closed and open scenario, but to the extend they do, it’s incumbent upon us to take the proper action and close or sell or do what is the right thing to do with those stores.

I don’t see it being that the same level it was this first run though, because we took a deep cut. So, to the extent that we sell off a chunk of stores or close another chunk, that may happen and likely in the coming month we’ll make those decisions, but I can’t give you that number today.

Joe Stauff – Susquehanna

Fair enough. Thanks very much. Best of luck.

Sam Martin

Thank you.

Jake Brace

Thanks John.

Operator

We’ll take our next question from Emily Shanks with Barclays Capital.

Emily Shanks – Barclays Capital

Good morning.

Jake Brace

Good morning Emily.

Emily Shanks – Barclays Capital

Hi, I had a just couple of questions. The first one is on the SG&A cost saves, the targeted $40 million and you mentioned the reduced headcount that is, it sounds like sort of immediately $10 million on a go forward basis in terms of savings. How long will the rest of that targeted cost savings take you to implement?

Jake Brace

Well, I guess I’d characterize we are above half way into it right now, and in our next fiscal year we will accomplish the rest, but we won’t reach full run rate obviously until ’12, but I think in next fiscal year we’ll be almost up to run rate on the full savings. So we’ll get most of it done this year, the vast majority of it done this year.

Emily Shanks – Barclays Capital

Okay, great. And then you’d also mentioned about a new store that you opened in New Jersey. How many leases are you guys locked into for new stores over the next 12 months, are there any?

Sam Martin

We have one Emily, one store that’s under construction currently.

Emily Shanks – Barclays Capital

Okay. And where is that?

Sam Martin

In the Philadelphia market.

Emily Shanks – Barclays Capital

Okay, great. And then I just want to clarify my final question is around the dark rent expense that you said during the quarter when you talked about cash flow. Did you say that it was $9 million payment this quarter?

Jake Brace

Yes, I did. It was $9 million, about $9 million in the quarter.

Emily Shanks – Barclays Capital

Okay. And what we can assume on a run rate basis, now because other stores are closed?

Jake Brace

That’s not a number that we forecast. Again, we’re not forecasting numbers, but you can see that we significantly reduced it quarter-over-quarter. We did add more dark stores this quarter, but we have a big focus on keeping that dark store number down and reducing it in a permanent fashion.

Emily Shanks – Barclays Capital

Okay, so just to clarify. Is it pretty steady by quarter? I guess I was just wondering if there’s different payments intra-year where for example I use [Ph] $9 million, a good run rate or –?

Jake Brace

No, I am not giving you any guidance on that. So, again it’s something that we have an ongoing program to minimize our dark store payments, that program did get a little press and you can see the results in the cash flows this quarter what we are not predicting what that might be in the futures quarters, and some of it quite frankly, Emily can be lumpy as we come to certain arrangements with our landlords and things like that.

But we’re focused sole on the cash, on the cash flow related to that, and trying to obviously minimize anything of cash flow related to dark stores.

Emily Shanks – Barclays Capital

Great. I appreciate the details, good luck.

Jake Brace

Thank you.

Sam Martin

Thanks, Emily.

Operator

We have time for one last question; we’ll take that question from Susan Anderson with Citi.

Susan Anderson – Citi

Good morning everyone.

Sam Martin

Good morning Susan.

Susan Anderson – Citi

So, back to the labor cost really quick, how would you compare I guess with your per hour basis versus competitors in that area? And I guess this could be comparable versus competitors with union. So, I am just trying to figure out if they are about the same level you guys rely with the union agree to lower that?

Sam Martin

Well, we can’t comment on what we motivate or enhance our negotiations. Certainly there are things that we believe we can make progress on and were certain uncertainties around how we can agree with those kinds of things with our union partners. Certainly the dialogue is underway and we except to make some progress, but I am not going to characterize what that looks like, because it’s behind close door negotiating.

Susan Anderson – Citi

Okay, great. And then on the price investments really quick, it sounds like you guys are pretty much done with them, and they haven’t really been a huge impact on top line yet, maybe because the consumers haven’t relied that the prices have gone down, but does that sent a signal many that you guys are pulling back on this going forward or should we expect that one that you made earlier in the year to flow through the back off?

Sam Martin

As I said earlier, it takes a significant amount of time for an action like that to really resonate from a customer prospective. So we are not saying, it was a wasted investment at all matter of fact, we believe it’s been a nice addition to our overall marketing and overall perspective of our store. It’s just not only sole thing we are going to rely on going forward. It is a piece of what we do.

And to the extend we have got, we are not going to tip our hat on what our pricing strategies are. That wouldn’t be profit for any retail company to do or any business actually. So, the idea here is that we’re going to enhance our customers’ value proposition; it’s not always a price perception that drives that value proposition. There is a number of other attributes that we think resonate with customers and we’re going to approach all those attributes and enhance our ability to show better value.

Susan Anderson – Citi

Okay, great. And then you talked about of larger focus on your loyalty card and really utilizing non data to I guess target consumers. How long do you think it’s going to take you to maybe see your segmentation and implement some sort of strategy to better target consumers?

Sam Martin

Yes well, Susan, it’s like this we’ve collected this data for a long, long time. We’ve not built any expertise around the analytics necessary to help us understand our customers at this level. So to the extend that we can develop the right talent in our organization to be able to do this. I can see the vision, I can see what we need to be. We have some work to do to get our teams trained and develop to understand how to get there.

We’ve started and we have some very small progress that I could that I’ll give credit for. But we have a much larger amount of work to do in this area and it comes from our internal development of our people to be able to do the analytics on this data, and make actionable initiatives to drive different custom behaviors from the data.

So this is not an overnight kind of thing, and again one of the reasons why we’ve articulated this turnaround plan being a rather lengthy turnaround right into 2012 is some of these things take longer than others, but they will continuously improve, and that’s the concept I want to make sure that everyone understands.

We won’t see a huge jump in any one particular day or month or hour. But we’ll see continuous improvement overtime, and we’ll see it in a lumpy way.

I mean there will be bits and starts and I don’t want anyone to think that this turnaround plan is going to be a steady solid line up; there will be good things that happen some things that come as bumps in the road that will overcome. And we’re prepared to be flexible in that regard, but certainly from the standpoint of our initiatives around the loyalty card and what we’re going to do with it. It will be tremendous, it will be, but it will build overtime.

Susan Anderson – Citi

Okay, great. And then really quick on inflation. I don’t think we talked about that yet or maybe I missed it, but I mean it looks likes your comps get improved sequentially a little bit, and you talked about then improving in the third quarter. Is there any – how much of that I guess is any its related to inflation or did all the COGS, cost inflation not really flow through because of the price investment?

Sam Martin

Yes, we haven’t seeing any inflation, now that’s not to say that we won’t, but who knows tight but certainly right now retail there has been, if anything we had some deflation right, because we have this price lowering event that happened earlier in our year.

Susan Anderson – Citi

Okay

Sam Martin

So we have not done anything about moving off of.

Susan Anderson – Citi

Okay, great. And then last question on private label, I know that you implemented the new price into new brand into the customer stores, how is that performing?

Sam Martin

Actually it’s performing relatively well. And it gives us confidence that as we develop our good better best strategy on our own brands that we have the ability to resonate with our customer on the value side and in price and in quality and upscale.

So, this is one side of it, we’ve seen some benefit on some of the other own brand lines as well. So, we’re encouraged by the read that we see on those.

Susan Anderson - Citi

Okay, great. And has penetration increased as a percent of sales?

Sam Martin

Yes.

Susan Anderson - Citi

I mean, then just really quick, I know you mentioned on the last call, you had the 900 million of collateral do you still back that?

Jake Brace

Yes, that hasn’t changed from the last call, no.

Susan Anderson - Citi

Okay, great. Thanks a lot guys and good luck.

Sam Martin

Okay, thanks.

Jake Brace

Thank you.

Operator

That concludes the question-and-answer session today. As this time Mr. Haub, I will turn the conference back over to you for any additional or closing remarks.

Christian Haub

Great, thank you very much. Thank you for participating in our second quarter call. We look forward to informing you about further progress of the turnaround in the next weeks in month. And talk to you on our next quarterly conference call early in January. Thank you very much.

Operator

That concludes today’s conference. Thank you, for your participation.

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