For years, Ames Department Stores was a well-run smaller, then medium-sized, discount department store chain, growing moderately but consistently and with profits edging higher every year. It was a business managed by the three Gelman brothers who created the company and nurtured it and would be horrified by its current bankruptcy.
Ames' merchandising philosophy had been to operate stores in smaller communities -- their outlets dotted the Eastern Shore, for example, in towns like Salisbury, Pocomoke City and Chestertown -- and thus be a big fish in a small pond, simultaneously avoiding the competition-intensive cities. Maryland is one of Ames' key states, with 37 stores in Maryland, including five in the Baltimore area.
Because of health, the Gelmans and Ames parted, and new, ambitious management took over. Where the Gelmans were satisfied with gradual growth, there was now a push to become a big company overnight. The way to do this, management thought, would be to acquire a major discount retailer, and they bit for the oft-rejected Zayre chain for more than two-thirds of a billion dollars.
And thus began the rapid decline and bankruptcy of what had been one of the best-run retailers in America.
Somehow, the Ames magic did not work at most Zayre stores. Zayre customers stayed away in droves, and sales declined sharply. When combined with takeover costs, the result was disastrous. Ames lost more than $6 a share in 1989; the next year a catastrophic $21-plus a share, and almost $8 a share last year. For the three years: a loss of $1.3 billion.
Ames had put itself in a hole that seemed almost inescapable. Many former Zayre stores and distribution centers were shut down as Ames retreated to its core stores, primarily the big fishes in small ponds in Eastern states. These stores are profitable, and annual sales are just under $3 billion, but the problem is the huge debt from the borrowing to acquire Zayre. The company's total debt is now about $850 million.
There had been earlier hints of problems at Ames. About five years ago, heavy inventory losses deeply concerned Irving Gelman, who headed Ames at the time. The losses were modified, but it took considerable time to get them down. Another problem was Ames' purchase of the G. C. Murphy Co., one of the nation's most respected variety store chains. Ames lost about $100 million on Murphy, selling it to the family that owned the McCrory chain, which is also in bankruptcy.
Ames has reported a $37 million loss for its first quarter, which concluded at the end of April. That loss was $10 million less than the deficit in the first quarter of 1990, and it included $10 million for bankruptcy expenses.
Of concern is the 11 percent decline in first-quarter 1992 sales at stores that were open a year ago. Ames' management blames this on a colder than usual spring this year, but the big sales drop didn't occur at other large retailers.
Of even more concern to Ames' shareholders is its plan of reorganization, which calls for turning the entire company over to its creditors. The stockholders, most of whom acquired their shares when Ames was a profitable retailer, will be out completely.
That arrangement, says a company spokeswoman, was negotiated between the company and its creditors, but it has not been put into effect.
Ames' shareholders are not enthusiastic about the $1.5 million annual salary for Chairman Stephen Pistner, a former McCrory chairman who was brought in to save Ames.
What is surprising is the trading strength that sometimes touches Ames. Recently, the share price quickly doubled from 50 cents a share to $1 a share. Last year, the share price rose from the same 50 cents to $3. Obviously, there is periodic speculation that the reorganization plan may not go through. The stock, which once sold for more than $34, and just two years ago for more than $10, today usually trades at under $1 a share.