Supermarket and grocery retailer Fresh Brands has reported a loss for its third quarter ended 8 October 2005, because of charges relating to three underperforming stores.

Net sales for the third quarter were $161m compared to $154m for same period a year ago.

As a result of the recognition of non-cash after-tax impairment charges of approximately $8.9m during the quarter, the company's loss from continuing operations was $8.194m compared to income from continuing operations of $599,000 a year ago.

For the first three quarters, net sales were $522m to $514m for the year earlier period. The company's loss from continuing operations was $7,8m for the first three quarters, compared to a loss from continuing operations of $199,000.

"During the third quarter of 2005, we realized excellent sales increases throughout our corporate and franchised Piggly Wiggly stores as a result of the continued success of our value proposition strategy, improved weekly promotions, and in-store merchandising programs," said president and CEO Louis Stinebaugh. "We are especially pleased that the sales increases also resulted in significant increases to operating profits in most of our corporate and franchised stores. We believe these results indicate that we are on track with achieving the goals of our retail pricing and marketing strategy."

"The retail sales increases have also driven significant sales gains in our wholesale segment as well. For the third quarter of 2005, our wholesale volume increased by 2.7% over the prior year," said Stinebaugh.

"The impairment charges we announced today primarily relate to three relatively new, but underperforming corporate stores," explained John Dahly, Fresh Brands' chief financial officer. "Excluding these charges, we achieved another positive quarter in our core operations."

"From the outset, these operations were challenged with expensive facilities and with an initial pricing strategy that was uncompetitive. During the past year, we attempted to significantly improve the sales volumes in these stores through the overall value proposition marketing changes, targeted marketing initiatives for these stores, and by seeking to effect in-market consolidation opportunities for these stores. Despite some notable recent success with these efforts, we now believe that we will not be able to recover the carrying value of our investments in these stores and, as a result, we were required under generally accepted accounting principles to incur these non-cash impairment charge," said Dahly.

"We intend to pursue the sale or closure of two of the stores within the first half of 2006 to eliminate their ongoing operating losses," said Dahly. "We anticipate the ultimate disposal of these two stores may benefit future operating results by approximately $1.3m annually. We currently do not intend to close the third store, but will further improve operating results by $0.2m annually."

"We also have committed to plans for alternate procurement and cross-docking arrangements of the general merchandise processed through our secondary distribution facility in Sheboygan, Wisconsin and will be closing that leased facility," said Dahly. "We expect to improve future operating results by approximately $0.3 million annually, or $0.06 per share, through the cross-docking arrangement beginning in the second quarter of 2006."

"The impact on our borrowings will depend on the timing and terms of disposal and whether we settle the lease obligations for the two stores and the secondary distribution centre," explained Dahly. "We estimate that the additional borrowings could be approximately $2.5m, net of proceeds from the sale of equipment, the liquidation of inventory, and tax savings from the settlement of the leases, although substantially all of the additional borrowing could be deferred if we choose not to settle the leases."