A&P Fact Case

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ACC411 Financial Statement Analysis

“FACt.”Case Report
The Great Atlantic & Pacific Tea Company

1. Problem & Objective
The Great Atlantic & Pacific Tea Company, Inc. (A&P) suffered from continued loss on the net income from 2000 to 2003, which caused a general concern on its high risk of bankruptcy. However, conflicting with analysts’ estimation, the company’s third-quarter financial results surprisingly exceeded their expectation, and stock price rose 23% to $9.28 per share on six times average daily trading volume. At the same time, there is concern that shareholders failed to recognize the real performance of A&P, and they simply used the financial results to forecast the future of the company. However, financial reports can be manipulated and give wrong signals. Our objective is to dig out more information from A&P’s financial reports and make suitable recommendations to investors/analysts/debt holders through further analysis of its business strategy and financial ratios by the end of 2003. 2. Frame & Analysis

As of January 2004, A&P operated approximately 643 stores in 11 states, covering various areas in food market. The supermarket business was highly competitive in terms of low profit margins on sales, and A&P had to compete on economies of scale through increasing volume of sales and store locations to maximize its profits. In addition, A&P was also challenged by other supermarkets, such as Wal-Mart, which expanded rapidly in large scale.  In the third quarter of 2003, A&P’s reported results that demonstrated improvement compared with the third quarter of fiscal 2002. Sales at the end of November 2003 increased by 4.9% compared with sales ended November 2002. In addition, the company’s gross margin increased, while store operating, general and administrative expense slightly increased. In 2003, the company divested multiple assets, selling nine supermarkets in northern New England and Wisconsin. It further divested Eight O’clock coffee division, totally generating $255.5 million proceeds. A&P is currently in the stage of maturity, intending to decline. From the financial statements, A&P’s revenue was stable around $10.43 billion, while net incomes were volatile (most in negative) from 1994 to 2003. During the period from 1994 to 2003, cash flows from operations were decreasing to negative in 2003. Cash flows from investment changed from negative $162.8 million in 2002 to positive $129.9 in 2003, with disposal of property $264.6 million occurring in 2003. Cash flows from financing were volatile from the lowest negative $147.6 million in 2001 to the highest positive $49.6 in 1999 during 1994-2003. SWOT Analysis strengths| |

Sales increasing |
Strong brand equity in the US market |
One of North America's largest retail food chains |
| Weaknesses|
|
Continued losses| | |
Declining profit margins| |
Declining sales in US| |
Decreasing capital expenditure may cause loss|
Opportunities|
Divest asset to generate more cash flows|
S&A cost decreasing| |
| Threats|
Intensive competition in the industry Wal-Mart's retail food business grew rapidly in large scale| |
|

2.1 Financial Ratios Analysis
In order to comprehensively evaluate A&P’s financial status, we analyzed its financial ratios from the aspect of profitability, asset utilization, financial distress (liquidity and solvency).   Profitability and efficiency analysis

First, we will decompose ROE to find out A&P's profitability and efficiency. On the first level of the ROE iceberg, A&P's ROE firstly dropped to negative number, -3.1%, in 2001. Then two years later, in 2004, ROE became even worse, which is -33.3%., indicating the profitability and efficiency deteriorate during the recent three years. By using the additive ROE...
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