Hechinger stock drops 24% in wake of projected earnings Analysts complain firm misled them

October 02, 1993|By Michael Dresser | Michael Dresser,Staff Writer Bloomberg News Service contributed to this article.

An article in some editions of the Business section on Saturday incorrectly reported the percentage of Hechinger Co.'s stock price decline on Friday. The company's Class A share price declined 19 percent, or $2.125 a share, to close at $9 a share.

The Sun regrets the errors.

Hechinger Co. gave the stock market a nasty surprise, so yesterday the market punished Hechinger.

The Landover-based retailer's stock plunged 24 percent yesterday after word trickled out late Thursday that the company's quarterly earnings would come in short of last year's. Its widely traded "A" stock lost $2.125 yesterday to close at $9.

But the news cost Hechinger far more than two bucks off its stock price. The company also sustained damage to its hard-won credibility among some of its biggest boosters.

FOR THE RECORD - CORRECTION

The company's notification to analysts, which came well in advance of a late afternoon press release yesterday acknowledging its problems, sent the price on a slide as analysts rushed to cut their earnings estimates.

Neal Kaplan, an analyst at Scott & Stringfellow in Richmond, Va., had been one of the most ardent proponents of the home improvement chain's stock, but yesterday he was upset and disappointed with Hechinger management. He said yesterday's news contradicted assurances the company gave him Monday after rumors of decreased earnings started circulating last week.

"I'm not sure that management was entirely fair in discussing it this week," Mr. Kaplan said.

Two other analysts, Tammi Kuntz of Morgan Keegan and Wayne L. Hood of Prudential Securities, lowered their ratings on the company stock. Ms. Kuntz, who had recommended Hechinger highly just a few weeks before, cut her earnings estimate from 17 cents to 9 cents and advised clients to sell it.

John Hechinger Jr., the company's chief executive, was unavailable for comment. Richard S. Gross, Hechinger's corporate controller and designated contact, was said to be in the office, but did not return calls.

In its release yesterday, Hechinger announced that it expects its net earnings for the quarter ending Oct. 30, 1993, to be below last year's $6.5 million, or 16 cents per share.

The company said the decrease was primarily the result of increased pre-opening costs of about $7 million for new stores in its Home Quarters Warehouse division, compared with $2.8 million in comparable costs last year.

By itself, that would not be critical, Mr. Kaplan said, citing it as an investment in the future.

What really stunned analysts and spooked investors were the other reasons Hechinger cited for the decrease: "promotional activity at the Hechinger Stores division and an adverse shrinkage result at the division's distribution facility."

The reference to promotional activity referred directly to the toll on Hechinger's margins as it attempts to compete with Home Depot, the industry powerhouse that has invaded Hechinger's core Baltimore-Washington market in the last two years.

Mr. Kaplan said he took that to mean that the company's projected same-store sales gain of 8 percent to 10 percent in September was not the good news it seemed on the surface.

"They're basically giving the stuff away. They're selling it below an acceptable price," he said. "It makes one wonder whether the cost structure is too high to be competitive."

The Richmond analyst said this is where he felt he was misled by the company.

"I was told earlier this week that sales were decent and that margins were OK," he said.

The reference to shrinkage also raised serious questions about management's internal controls. Shrinkage refers to merchandise lost through theft, errors, damage in storage or other reasons unrelated to sales. For a company with Hechinger's relatively narrow margins, an increase in the rate of shrinkage can be a serious concern, Mr. Kaplan said.

Hechinger's bombshell came just as the company seemed to be recovering from a widespread impression that it would be unable to compete effectively against Home Depot.

Hechinger enjoyed a strong earnings gain in the second quarter and had posted encouraging summer sales gains at stores that were also open a year ago. Those numbers led to an August surge that carried the stock from single-digits to $12 as recently as Sept. 20.

Yesterday it lost all those gains and more. Hechinger's closely held "B" stock followed the "A" stock, closing down $2 at $9.25.

"I think they've lost some credibility in the investment community and I think they've lost some momentum," Mr. Kaplan said.

"Now it's going to be hard for anyone to take them seriously."

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