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Unload Shares of Great Atlantic & Pacific Tea

Great Atlantic & Pacific Tea (GAP) recently reported earnings, a company we rate a sell. Our recommendation is based on the company's weakness in fresh segment sales, dwindling cash position and reported net loss.

In addition, GAP faces risks from mounting debt, negative returns and a weak liquidity position. However, impressive revenue growth, increasing shareholders' equity and higher average weekly sales per supermarket are the upsides to our sell rating.

Here are the earnings highlights:

  • The company's fresh segment performed poorly. GAP's third-quarter sales at its fresh segment contributed 50.5% of the total sales. Sales in this segment declined 2.9% to $1.07 billion from $1.10 billion, due to store closures.

  • GAP swung to a net loss of $13.63 million, or $1.35 per share, from a net profit of $57.31 million, or $1.73 per share, in the third quarter of 2007. The year-ago results benefitted from a gain of $106.06 million from the sale of Metro Inc. shares. Loss from continuing operations totaled $2.99 million compared to net profit of $73.08 million in the prior year's quarter.

  • GAP reported a dwindling cash position and higher leverage level. The company's cash position during the third quarter dwindled, as reflected by a 72.9% decline in cash and cash equivalents and a quick ratio of 0.47. Moreover, the debt-to-equity ratio deteriorated to 3.29 from 1.49 a year ago, as total debt surged 176.1% to $1.49 billion.

  • Other metrics are also negative. Dragged down by reported net loss, return on equity swung to negative 10.48% from a positive 33.46% in third-quarter 2007. Similarly, return on assets stood at a negative 2.43%, compared to a negative 5.16% a year earlier.

There are risks to our sell rating.

GAP's overall revenue grew 69.5% to $2.12 billion over the previous year's quarter, fueled by the acquisition of Pathmark stores. Additionally, GAP realized synergies of $30 million during the third quarter from the integration of Pathmark. Moreover, GAP expects to start generating positive cash flow in in the fourth quarter and in fiscal year 2009.
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