Tops Posts Higher Q2 Sales, Narrows Net Loss

Tops Holding II Corp., the indirect parent of Northeastern regional retailer Tops Markets LLC, reported a sales increase of $10.4 million to $555 million for the second quarter ended July 16, while the company’s net loss for the quarter improved to $2.9 million.

“We delivered solid performance in the quarter as higher-margin sales and strong cost control drove a 6 percent increase in adjusted EBITDA” to $36.6 million, noted Frank Curci, chairman and CEO of Williamsville, N.Y.-based Tops. “Along with the rest of the supermarket industry, we continue to be challenged by food cost deflation, particularly in meat and dairy categories, which drove a small decline in same-stores sales in the quarter. Despite those persistent headwinds, we continue to improve Tops’ earnings power through our growth as our net loss improved 92 percent and the adjusted EBITDA improvement was our third consecutive quarter-over-quarter increase.” 

Added Curci: “Tops’ market share remains very strong as we are making gains across our entire market footprint in a highly competitive environment. Notably, during our second quarter, we achieved our best market share trends in recent years. On top of that, we recently announced agreements to purchase five supermarkets in the Hudson Valley region of New York and one supermarket in north central Massachusetts as part of a merger-related divestiture, and have also purchased a smaller supermarket in central New York.”

Last month, Tops said it would purchase four supermarkets from The Stop & Shop Supermarket Co. LLC and two supermarkets from Hannaford Bros. Co. LLC and Martin’s Foods of South Burlington, LLC in eastern New York and Massachusetts.  The transactions are expected to close later this month.

Curci described the deal as one “expected to be highly accretive and improve our leverage. The stores we are acquiring strengthen and extend our geographic footprint while requiring minimal incremental general and administrative expenses. Overall, we feel very good about our performance and are extremely excited for what the future holds.”

The transaction, along with the recent addition after the end of the quarter of a small store outside Syracuse, N.Y., will bring the total number of Tops’ corporate stores to 172.

Second Quarter 2016

Sales increased with the addition of seven acquired and new supermarkets opened since May 2015, contributing $12.8 million of incremental sales. Same-store sales dipped 1.1 percent, largely because of food cost deflation in certain categories, including meat and dairy, combined with competitive pressure to respond by reducing prices. The decline in fuel sales was mainly attributable to a 15.6 percent slide in the average retail price paid per gallon at the grocer’s 52 corporate fuel stations during the quarter.

The 80 basis-point increase in gross profit margin was primarily due to product mix, given the smaller proportion of relatively lower-margin fuel sales.  Distribution costs were down 16.6 percent to $9.6 million, largely as a result of a $1.7 million decrease in self-insured workers’ compensation claims expense.

The seven acquired and new locations opened since May 2015 drove many operating expense lines higher, according to Tops. As a percentage of sales, most major operating expense categories were relatively consistent, reflecting strong cost controls. Operating income was relatively flat despite a $2.1 million noncash impairment during the 2016 period.

Net loss improved measurably because of higher inside sales and gross margin, along with with $34.5 million of debt extinguishment costs during the prior-year quarter related to the 2015 debt refinancing. 

28-week Period

For the 28 weeks ended July 16, inside sales reflect $29.5 million of incremental contribution from the seven acquired and new supermarkets opened since May 2015, partly offset by a $2.4 million reduction in pharmacy sales from the January 2015 closure of 27 in-store pharmacies and a 1.3 percent decrease in same-store sales due to food cost deflation.  Fuel sales were negatively affected by a 19 percent plunge in the average retail price paid per gallon. 

Gross profit margin grew 60 basis points, largely on account of the shift in product mix given the smaller proportion of lower-margin fuel sales and a $4.4 million reduction in distribution costs, which was primarily attributable to $1.9 million of incremental savings associated with the amendment of certain operating terms of Tops’ agreement with Keene, N.H.-based distributor C&S Grocers and a $1.7 million decline in self-insured workers’ compensation claims expense.

Lower operating income during the 28-week period ended July 16 reflects the $11 million gain in the 2015 first quarter from the January 2015 sales of pharmacy assets and a $2.1 million noncash impairment in the 2016 period. The improvement in net loss is attributable to the debt extinguishment costs related to the 2015 debt refinancing that occurred during the 28-week period ended July 11, 2015.

For the first 28 weeks of 2016, adjusted EBITDA was $73.7 million, an increase of $3.7 million, or 5.2 percent.   

The company expects that it will invest between $40 million and $45 million in capital expenditures in 2016, including the pending acquisition of six stores.

Employing about 15,000 associates, Tops operates stores in upstate New York, northern Pennsylvania and Vermont.