It’s been a business month for bankrupt A&P. The Montvale, NJ retailer, which filed for Chapter 11 protection on December 12, asked the Bankruptcy Court to allow it to close 32 under performing stores, unveiled its new management team, updated its vendors on its objectives, and asked the Court for an extension to file its reorganization plan. It also posted its four week sales and earnings as required by the court.
For the period beginning January 2 and ended January 29 A&P and four of its affiliates incurred a net loss of $27.4 million on total sales of $602.7 million in the four-week period.
A&P also received Bankruptcy Court approval on February 22 to extend until March 25 the time it has in which to submit its full schedules of assets and liabilities. A&P informed the court in its December 12 petition that as of September 11 it held total assets of $2.53 billion, and owed debts totaling $3.21 billion. A hearing to consider A&P’s motion seeking an extension of time in which to file an exclusive Chapter 11 plan of reorganization and to solicit acceptances to such a plan to December 31, 2011 and February 29, 2012, respectively, will be held March 8. Also on March 8, the court will hear information related to the debtor’s request to commence store closing sales at 32 locations and a motion filed by nine creditors seeking an order directing the appointment of an official committee of direct-store-delivery/trade creditor’s in A&P’s bankruptcy case.
That $27.4 million loss continued a negative trend that began when A&P reported its first period sales and earnings in January. During that initial bankruptcy four week stretch which ran from December 5 to January 1, the beleaguered retailer incurred a net loss of $104.9 million on total sales of $621.5 million for the period.
As for store closures, on February 15 asked court permission to begin the process of closing 32 stores, including 13 Pathmark units, eight Super Fresh stores, seven A&P stores, three Waldbaum’s stores and one Food Basics store.
Pathmark stores that are slated for closure include units in: Glasgow, DE; Deptford, NJ; Gillette, NJ; Hillsborough, NJ; Livingston, NJ; Middletown, NJ; North Hackensack, NJ; South Plainfield, NJ ; Whippany, NJ; Brooklyn, NY (Nostrand Avenue); Commack, NY; Hartsdale, NY; and Bethlehem, PA.
The eight Super Fresh units that will be shuttered are stores located in: Ocean City, MD (Gold Coast Mall); Cape May Courthouse, NJ; East Windsor, NJ; Hamilton Township, NJ; Hammonton, NJ; Mt. Holly, NJ; Lionville, PA; and Yardley, PA.
A&P bannered stores will be shuttered in: Barnegat, NJ; Flanders, NJ; Manville, NJ: Carmel, NY; Greenburgh, NY; New Rochelle, NY; and Port Chester, NY.
Additionally, Waldbaum’s stores in Farmingdale, NY, Smithtown, NY and Valley Stream, NY, and a Food Basics unit in Bridgeport, CT are scheduled for closing.
A&P stated that it intends to close each store on or around April 15 and to exit the premises on or around April 30, subject to court approval of the motion.
As part of its motion, the Tea Company is seeking Bankruptcy Court approval for the sale of certain of its assets in connection with the store closing sales and the authority to enter into a consulting pact with a liquidation consultant. The filing also seeks the authority to allow A&P to assume and assign or reject unexpired leases subject to the store closing sales.
In its filing, A&P stated that working with its advisors, it has devised a process to identify store closure candidates. Specifically, the analysis has focused on each store’s current and projected profitability, as well as each store’s potential for rehabilitation.
A&P stated that in order to stem the ongoing negative earnings and cash flow impact of these stores, it intends to close its irreversibly unprofitable stores as soon as possible. The Montvale, NJ based retailer said this first round of closings will produce a $24 million EBITDA improvement from last year. The company added that the store closures and the ensuing potential sales will pave the way for development of a business plan focused on a scaled-down number of its most profitable stores and provide a foundation for a plan of reorganization. At the March 8 hearing, A&P will state its case for the store closures.
When it filed its Chapter 11 bankruptcy petition on December 12, A&P operated 395 supermarkets and was a party to more than 765 non-residential real estate leases and owned another 22 properties. Since the outset of its case, the debtor has obtained Bankruptcy Court approval to reject 73 burdensome leases, 25 underperforming store leases and 26 related subleases.
In addition, the court entered an order February 7 granting A&P’s motion seeking expedited procedures to reject or assume certain executory contracts. The court also stated that any contract with more than $20 million in annual revenue or payments must be approved by a separate motion filed by A&P.
In related news, A&P also announced the appointment of six operating executives to its merchandising and marketing team in order to sharpen the company’s focus on enhancing value for customers, while reducing structural and operating costs, the retailer noted.
Marie Robinson, previously the senior VP of supply and logistics for Smart & Final Stores LLC, has been named as A&P’s senior VP-supply and logistics. Nancy Gaddy, formerly the VP of deli, bakery and foodservice operations for Winn-Dixie Stores Inc, was named VP-deli and bakery for A&P. Kevin Broe, previously the VP of sales and merchandising of “owned” brands for Supervalu has been appointed to the role of VP-“owned” brands for A&P. Harry Giglio, who formerly was VP of perishables for Weis Markets, was named A&P’s VP- meat and seafood. Bob Weidner, who previously held management positions at Jewel Food Stores, has been appointed as the VP-customer experience and space management for A&P. Corey Pearson, who was the director of merchandising execution for Supervalu prior to joining A&P, was named as the company’s VP-pricing and analytics.
Tom O’Boyle, A&P’s executive vice president of merchandising and marketing, stated a key element of the company’s comprehensive turnaround is to further enhance value for its customers and their shopping experience in its stores. O’Boyle added that the six newly appointed operating executives will significantly strengthen A&P’s merchandising and marketing organization and supply chain and advance the company’s operational and financial restructuring.
On February 17, A&P hosted a meeting with its key vendors at the Marriott in Park Ridge, NJ. O’Boyle, CEO Sam Martin and five other executives addressed the crowd of about 500 brokers, reps and distributors. The meeting was described as comprehensive and lengthy, lasting nearly six hours.
Here’s a recap of the comments from each of the seven speakers:
Sam Martin – stressed the importance of A&P returning to its “core.” He introduced the new team and the specified objectives for the turnaround which included: reduced structural and operating costs; improving value propositions; enhancing the customer experience; and ultimately emerging from Chapter 11. He noted the company’s previous strategy was to sell things off; this is not the direction they will now follow. He addressed the restructuring process by noting A&P’s $800 million Debtor-In-Possession (DIP) financing; its plan for a store footprint rationalization, adding the retailer’s “period 12” was $23 million over plan.
Tom O’Boyle – he provided a framework for the specific topics the other speakers would address, emphasizing the importance of creating customer demand; developing customer segments and profiles through data; and becoming the neighborhood store with each banner clearly being differentiated. He added that the retailer’s SKUs will vary (even on a store-by-store basis) and that A&P must deliver better service and improve its customer communication. O’Boyle recognized that A&P is currently number two in the Metro NY market (behind ShopRite) and they are shooting to be number one in the country’s largest marketing area.
Paul Hertz, executive VP-operations – noted the urgency to develop a clear plan that would lead to solid execution, adding that he is not happy with current operations standards and will shortly be launching a new plan with expectations that will produce better execution. Hertz also mentioned three priorities for A&P: clean stores, in-stock conditions and great customer service, all of which are currently inconsistent.
John Moritz, senior VP-marketing and advertising – a very enthusiastic individual, Moritz focused on individual banner positioning and brand identity and introduced the following new slogans: A&P – “The Great Atlantic & Pacific Company, Your Neighborhood Your Store;” Pathmark – “Freshness You Can Taste, Values You Can Trust;” Waldbaum’s – “The Best Value in the Neighborhood;” Super Fresh – “Eat Well Live Well;” The Food Emporium – “Your New York Market.” Moritz also said A&P will be improving segmentation analysis of its shoppers and create enhancement programs to create more business, particularly focusing on health/wellness, ethnic, lifestyle and loyalty programs.
Bill Gillispie, senior VP-merchandising, center store, fresh and pharmacy – provided the most detailed presentation of the meeting. He reviewed the objectives of his department: hit numbers; improve customer focus; develop a profitable sales focus; create known value items, edges and points of difference. Gillispie said he is willing to listen to vendor recommendations to define category roles and SKU optimization, adding that A&P recognizes the need to partner with their vendors to get this all done and to execute at store level. He then spoke of the roll out of A&P’s new business model. In quarters one and two, 38 categories representing 42 percent of sales will be completed. During quarters three and four, 56 categories will be revamped representing 33 percent of sales. A third phase, which has not yet been finalized, is also targeted for a Q4 completion. Gillispie said A&P will look to use vendor funding in a more effective way to drive sales. The retailer said it realizes the funding comes from one fund and should be used to directly impact and drive sales. Funds will now go directly to the category, unlike in the past where they used funds to support synergy programs. The merchandising strategy going forward will be a hybrid EDLP/Hi-Lo. A&P recognizes that it needs need to bring customers back into the store with lower everyday pricing and it is looking to become more competitive. He also addressed A&P’s “own” brands. He reviewed brand identity and positioning; product innovation; merchandising and pricing rules; and stated that there were too many SKUs in private label. Gillispie also talked about private label sourcing and pricing. He asserted that A&P’s “center of plate” initiative is vital and added that there will be a big focus on “protein” through the meat and seafood departments. He reinforced the point by noting that destination departments increase loyalty through its “champion shoppers” a segment that now represents 11 percent of A&P’s customers and represents 40 percent of overall sales. Gillispie also addressed the importance of improving A&P’s “fresh” image, specifically the meat and seafood departments, now under the supervision of Harry Giglio. He discussed how the responsibilities within each department will change in regards to the categories they are covering, using processed meat as an example (currently there are several departments that oversee these products). He believes that by moving them into one department, it will allow the category manager to better utilize their expertise. All processed meat will now be under the dairy department. In addition more space will be allocated within the stores to frozen meat and seafood (fresh seafood department) to expand the center of plate initiative. And finally, Gillispie stated that all stores will now have a pharmacy.
Marie Robinson, senior VP-supply chain – a concise and direct speech, Robinson noted that she recently moved here from California with her family and her bottom line is to make this work.
Currently, A&P’s entire supply chain is outsourced (primarily through C&S) which does not allow them to have any controls, which essentially means it’s broken. She said she is looking to bring some of those functions back in house, starting with transportation. At this time, A&P is collecting bids for a short-term three year contract to begin June 1. She described her objectives succinctly: bring back certain aspects of the supply chain function; utilize direct-to-store shipments where possible; find opportunities for distribution center by-pass programs; and increase the usage of pre-built store displays.
Carter Know, senior VP-human resources – discussed the company culture and recognized that one of the disconnects with the Pathmark deal was that the two cultures never effectively blended. He said A&P is seeking to create a more “personal” perception with a new customer service program to roll out this summer. TV/video will be used to communicate between corporate and store level.
Related to the new management team, A&P has asked the Bankruptcy Court for permission to enact a short-term incentive plan it claimed would help retain key employees and improve company performance while it operates under Chapter 11 status. The proposed plan would aid 146 salaried employees up to $6.8 million in cash, provided the chain can reverse a decline in same-store sales while maintaining or improving margins during a 28-week period beginning with the commencement of A&P’s new fiscal year Feb. 27.
The plan could potentially allow four senior executives to earn 175 percent of their base salaries while providing 100 percent bonuses for other participants, including the company’s chief information officer, senior vice presidents, vice presidents, senior directors, directors, district managers and senior category managers.
A&P’s chief executive officer, Sam Martin, and Jake Brace, its chief restructuring officer, are specifically left off the program. They are looking to negotiate separate incentive agreements, A&P stated.
“In doing so, these individuals sought to eliminate concerns about ‘executive enrichment’ and build consensus around their efforts to address an immediate business need,” the filing said.
Financial rewards under the proposed plan would only payable only upon achievement of defined performance thresholds over seven four-week reporting periods. The chain set “targets for same store sales growth of negative 1.6 percent vs. the same period last year, and merchandise margins of 34.8 percent, to earn 66 percent of bonuses. If A&P achieved negative 3.6 percent of same store sales and 34.6 percent merchandise margins, it would pay 33 percent of the bonuses. Sales increases of 1.4 percent and margins of 35.1 percent would result in maximum payouts.
The troubled retailer said it would be cycling same store sales declines of between 6 percent and 9 percent and 2010 merchandise margins of 34.5 percent. Meeting targeted levels would result in incremental revenues of $18 million net of bonuses, The Tea Company noted.
A&P said the incentive program would keep competitors from going after existing executives while rewarding associates who have more responsibilities because of cost cutting and previous layoffs. A&P said 18 salaried executives have left since the company filed for Chapter 11 on December 12, including its chief financial officer, Brenda Galgano.
“Recruiters are targeting certain members of the debtors’ management team, and the debtors’ management team includes many individuals without long-standing ties to the business,” A&P stated. “The loss of a handful of key employees could quickly cascade into broad-based departures across the debtors’ operations, unraveling their restructuring from the inside out.”
A&P will state its case for the incentive program at a March 8 hearing Bankruptcy Court hearing.
In other related events, A&P’s primary supplier, C&S Wholesale Grocers, has now officially closed six organized distribution centers in northern New Jersey that were dedicated to supplying A&P units and those of its affiliated banners, after contracts at those facilities expired. And C&S also gained approval for trucking rights after the Bankruptcy Court rejected the appeal of Grocery Haulers, Inc., which had been the Tea Company’s drayer to its Pathmark units under a contract that it inherited when it acquired that regional chain in 2007.
A&P argued that it would become more efficient if C&S handled its trucking needs because the Keene, NH wholesaler was currently responsible for supplying about 70 percent its merchandise. A&P added that the Grocery Haulers contract was priced substantially above-market. A&P claimed that an interim month-to-month trucking arrangement with C&S beginning on February 6 would save the retailer approximately $7.6 million per year.
And February 6 was the date that C&S (and its Woodbridge Logistics subsidiary) closed those six depots and began shifting distribution to other company warehouses in Maryland, Pennsylvania, Delaware and Connecticut. About 1,300 jobs were affected. According to Woodbridge Logistics VP Rick Stacy, operating the Woodbridge facilities costs about $46 million more annually than if operations were relocated to the company’s other distribution centers. He said the company had 20 months of discussions with the union, but could not reach an agreement. “We have been in discussions for many months, yet were unable to find the necessary cost savings,” Stacy said.
On February 18, A&P filed a motion seeking an extension of time in which to file a Chapter 11 plan of reorganization and to seek acceptance to such a plan.
The bankrupt retailer asked the court for permission to delay filing a plan until December 31, 2011 and to solicit acceptances of any plan up to February 29, 2012.
A&P said three areas in particular will take substantial effort and time, including legacy liability issues, supply and logistics and rationalization of the store portfolio.
Specifically, A&P and its affiliates are parties to 39 separate collective bargaining agreements and it also sponsors, maintains and/or contributes to two single employer defined benefit pension plans and has withdrawal liability obligations with respect to a handful of other multi-employer plans. The retailer said it and its affiliates must work with their constituencies to find a sustainable labor solution that sufficiently accommodates the debtors’ needs to control labor costs, attract and maintain a qualified and motivated workforce, have sufficient flexibility to adapt their labor agreements to their business needs and achieve a sustainable balance between the debtors’ capital structure and pension obligations to ensure the availability of favorable exit financing options.
During that same hearing, A&P noted that as of the Chapter 11 petition date, its two largest supply and logistics agreements were with C&S Wholesale Grocers Inc. and Grocery Haulers Inc. A&P told the court the pricing and structure of both of these long term contracts placed it at a competitive disadvantage by directly increasing costs and by preventing it from reducing costs by seizing opportunities to achieve network and operational efficiencies.
The retailer stated that currently it is in the midst of running a competitive bidding process with the goal of either restructuring the C&S contract or locating an alternative single-or multi-provider supply and logistics solution that it hopes will produce substantial cost savings to the debtor companies.
According to A&P, it and its advisors have identified the aforementioned 32 stores to be closed in the immediate future, 31 of which are chronic underperformers with no meaningful near-term turnaround prospects. A&P told the court it also plans to re-initiate a sale process for a group of 25 stores operating under the Super Fresh banner to maximize value for the bankruptcy estate. A&P stated it and its affiliates intend to continue focusing heavily on achieving their optimal store footprint as the 210-day extended deadline to assume or reject their commercial leases quickly approaches.
A&P finished by stating it needs time to properly implement the complex operational restructuring initiatives, which, in turn, will dictate the amount and type of value that will be available for distribution pursuant to whatever Chapter 11 plan is ultimately filed.
At the March 8 hearing, the Bankruptcy Court hearing will also consider A&P’s extension request, as well as its motion seeking the court’s permission to begin store closing sales at those 32 locations.
Also on February 18, Frito-Lay Inc, Kraft Foods Inc., PepsiCo/Frito-Lay, Nestle USA, Bimbo Bakeries USA, Kellogg North America, Wise Foods, Dr. Pepper/Snapple Group and Campbell Soup, collectively the requesting creditors, filed a motion seeking a court order directing the appointment of an official committee of direct-store-delivery/trade creditors in A&P’s bankruptcy case.
The U.S. Trustee appointed the official committee of unsecured creditors on December 21, which consists of the pension benefit guaranty corporation, two pension funds, two unions, a landlord, an indenture trustee, a dairy and food and drug wholesalers with executory contracts. On January 26, the requesting creditors asked the U.S. Trustee to appoint an official committee of direct-store-delivery/trade creditors. That request was denied by the U.S Trustee on February 16.
The requesting creditors informed the court in the motion that they have mutual interests that are clearly distinct from those of the unsecured noteholders, pension funds and landlords dominating the official committee of unsecured creditors. Specifically, the requesting creditors state that unlike those creditors, many direct-store-delivery/trade creditors continue to extend credit terms to the debtors post-petition, providing the debtors with needed cash flow without the benefit of critical vendor protection. Accordingly, the requesting creditors told the court the direct-store-delivery/trade creditors face very significant exposure both pre- and post-petition.
Those creditors added that the DSD/trade creditors are also differently situated from most of the members of the current official committee, and cannot be adequately represented by them, because the direct-store-delivery/trade creditors are not only important to the process of the debtors’ bankruptcy cases, but also will continue to be key partners of the debtors after emergence from Chapter 11.
The requesting creditors stated that their products are found in every aisle of the debtors’ grocery stores and without said products, there is no supermarket. The requesting creditors said trade credit provided by direct-store-delivery/trade creditors will be instrumental to the debtors’ reorganization efforts and post-emergence operations.
A hearing related to the requesting creditors motion will also be heard on March 8.