THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Friday, October 18, 1996 TAG: 9610180526
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY STEPHANIE STOUGHTON, STAFF WRITER
DATELINE: NORFOLK LENGTH: 93 lines
Number crunchers who rate companies' ability to repay debt are growing leery about Farm Fresh's prospects as powerful new competitors crowd into the chain's territory.
Norfolk-based Farm Fresh Inc. is the regional market leader among supermarket chains. But its share has been eroding as grocery chains - everyone from Harris Teeter to Super Kmart - open more stores in Hampton Roads.
Those competitors ``are capable of absorbing aggressive pricing and promotional spending to win market share,'' Moody's Investors Service, a New York-based debt-rating agency, said in a recent report.
Farm Fresh, on the other hand, can only take so much, the agency said.
The number crunchers acknowledge that Farm Fresh has held its own in some areas. Moody's said the chain's management has succeeded in minimizing the impact of its competitors' grand openings.
Store grand openings, which offer especially low prices and attract mobs of curious shoppers, tend to be brutal for nearby supermarkets. But customers, if they're not impressed, will quickly return to their regular grocer.
Meantime, Farm Fresh has partially retreated to its Hampton Roads roots. It sold its Grocery Store locations in the Richmond area to Hannaford Brothers Co. last year, and began aggressively renovating its Hampton Roads stores.
But the local grocer still must deal with its heap of debt, mainly from its leveraged buyout in 1988. Interest payments on that debt are taking a bite out the company's operating cash flow, Moody's said. And if the chain's situation does not improve, it may not have enough money to make interest payments or fund capital projects, it said.
``While the company has remodeled its store base in recent years, it has limited capacity to continue to remodel stores,'' Moody's reported. ``This will likely weaken Farm Fresh's competitive position over time.''
Farm Fresh Chief Executive Michael E. Julian discounted many of the concerns raised by Moody's and Standard & Poor's, another debt-rating agency. He said many of the issues are aimed at speculative bond traders.
``None of them has raised concerns about whether Farm Fresh can pay its current bills,'' Julian said. ``That's because there are none.''
But officials with Moody's and Standard are still concerned. Both services downgraded their ratings of Farm Fresh's debt. In addition, Standard issued a negative outlook for the company.
Both agencies said they believe the chain's parent company, FF Holdings Inc., will have problems making interest payments beginning April 1998. That's when a certain portion of FF Holdings' debt must be paid in cash.
Julian said FF Holdings' payments won't impact the operating company - Farm Fresh.
But he acknowledges that Farm Fresh carries an imposing amount of long-term debt, mainly from its leveraged buyout eight years ago. A Citicorp affiliate financed the deal, which took the chain private. Local Farm Fresh investors include Julian, Keith E. Alessi and attorney Vincent J. Mastracco Jr.
Today, Farm Fresh has nearly $262 million in debt. Its parent company carries even more - about $341 million.
Of that $341 million, FF Holdings has about $80 million in debt at an unusually high rate of 14.25 percent. Other supermarket chains burdened with stacks of debt after the '80s buyout craze have since dealt with their IOUs, said Steve Weinstein of the industry publication Progressive Grocer.
``The most expensive note that Safeway (Inc.) has is 10 percent,'' Weinstein said. ``Everything else is paid off or renegotiated.''
If Farm Fresh wants to keep up with its interest payments and store renovations, it may need to restructure its debt over the next 12 to 18 months, Standard wrote in its report.
Julian disagreed, saying there's no urgency.
``I think something needs to be done as soon as it's practical,'' he said. ``You have to find the right method of doing something, and now might not be the best time to do it.''
Industry observers and retail analysts have said that another option for Farm Fresh may be a buyout offer.
But it's not clear whether Farm Fresh, which has 38 grocery stores and 13 warehouse-style outlets, has been seriously courted. Rumors of impending buyouts by Harris Teeter, Hannaford Brothers and Winn-Dixie Stores Inc. have floated around for years.
Julian has discounted all of them.
``They've been just that - rumors,'' he said. ILLUSTRATION: Color file photo/The Virginian-Pilot
Farm Fresh is paying its bills today, but debt-rating groups have
concerns about its future.
Color Graphic by Robert D. Voros/The Virginian-Pilot
Source: Securities and Exchange Commission
[Farm Fresh Figures]
Sales & Earnings
Total Long-Term Debt
Interest Expense
[For complete copy, see microfilm]
KEYWORDS: FARM FRESH PROFILE DEBT by CNB