Pathmark Readies for Rescue

Events conspired to produce the slide, despite higher sales and improving profits as shareholders prepare to meet on June 9 to vote on the company's sale of a 40%-stake to Los Angeles-based turnaround specialist, Yucaipa. During this year's opening quarter, a review of strategic alternatives cost $900,000, without which the net loss would have been $1.6 million. Furthermore, in first-quarter 2004, it realized a $1.2-million gain from the sale of real estate, without which the loss during that quarter would have been $2.5 million.

"We're encouraged by improved sales in the quarter relative to our prior run rate," said CEO Eileen Scott during a conference call. "We also saw an improvement in gross profit, which was offset by costs related to higher oil prices." Scott said that with Yucaipa "there is an aggressive investment plan to grow Pathmark business," and the company would share than plan following the shareholder vote and closing of the transaction, which is expected to occur shortly after the vote.

Meanwhile, on Thursday, June 2, shares of Pathmark common stock continued the rise that began on March 24, following the announcement of Yucaipa's plan to infuse $150 million into the troubled grocery chain. On that day, shares of PTMK on the Nasdaq shot up 32% to $5.92 a share. Following Thursday's first-quarter earnings report, shares closed at $8.83.

This May, the Pathmark board rejected an offer from an unnamed equity group to purchase the company for $8.75 a share. According to an SEC filing, the board judged that the offer would not be a "superior proposal" to the Yucaipa agreement.

During Thursday's conference call, Scott listed four areas of concentration in Pathmark's ongoing strategy. They include a focus on health, diet and nutrition through more organic and natural products; increased private label products; better alignment with the increase in the Hispanic population, and addressing consumers' need for convenience through enhanced customer service.

Hispanic food sales for the approximately 140-unit chain rose 8% in this year's first quarter. Scott attributed the rise to a "strong ethnic marketing program. We feel well-positioned to capture a larger share of this growing market," she said. A new "It's About Time" initiative focuses on customer services that speed the shopping and checkout experience.

Pathmark's Baby Club is also showing success, according to Scott. The company has increased products in the baby category to raise overall baby-product volume and offset losses in diaper sales that have gone to warehouse club chains and other discounting outlets. The chain also added dollar store sections in 25 units, and Scott said they are doing well.

"Cost inflation has moderated," she said. However, "the high cost of oil is expected to increase transportation costs and the costs of some goods."

During first quarter, Pathmark's cash capital investments totaled $6.7 million, and it closed one store and renovated one. During the remainder of this year it plans to open two new stores, close one and complete seven store renovations.