Merry-Go-Round's stock plummets More projected losses scare investors

November 25, 1993|By Michael Dresser | Michael Dresser,Staff Writer

Merry-Go-Round Enterprises spun out of control on Wall Street yesterday as investors dumped its stock at a dizzying pace.

Already battered by nearly a year of slumping sales, the Joppa-based retail chain's shares careened to their lowest level in more than three years on extremely heavy volume. The company's shares dipped to $6 before rebounding to close at $6.50, a one-day decline of $1.125, or 14.75 percent.

The 3.7 million shares traded included a block of 1.16 million shares, equal to 2.2 percent of shares outstanding, which traded at $6.25. That transaction suggested that at least one large institutional investor was sufficiently spooked by the company's reported credit problems and projected third-quarter loss that it decided to cut its losses.

For Leonard "Boogie" Weinglass, Merry-Go-Round's chairman and largest stockholder, yesterday was one more blow in what is turning out to be a miserable autumn.

Last month, National Football League owners gave a cool reception to Mr. Weinglass' bid for a Baltimore franchise. This month, Gov. William Donald Schaefer jumped on a rival bidder's bandwagon in a last-ditch effort to bring an NFL team to Baltimore. And yesterday, the pony-tailed mogul chalked up a paper loss of about $5.8 million -- just one in a series of bad days on the New York Stock Exchange since Merry-Go-Round's stock peaked at $21.375 in June 1991.

Merry-Go-Round's stock market woes reached new depths yesterday after a double dose of bad news.

The first blow was a report yesterday in the New York Times that some credit-rating agencies and merchandise-financing companies, known as factors, had issued warnings to manufacturers against shipping goods to Merry-Go-Round. Soon after that, the company issued a news release announcing that it expects to take an estimated $28 million to $32 million charge against third-quarter earnings on top of a modest operating loss. The company said 70 percent of the charge would reflect the cost of markdowns on slow-moving inventory.

The third-quarter loss, which an Alex. Brown & Sons analyst, Robert Buchanan, has estimated at 34 cents a share, would follow a 5-cents-a-share loss in the second quarter.

In addition, the company has posted 10 straight months of declining same-store sales compared with the same period last year.

In an interview after yesterday's earnings announcement, Merry-Go-Round President Michael D. Sullivan held out little hope of a quick turnaround. He said the company is looking past Christmas and will stake its fortunes on a spring rebirth.

"It would be very difficult to have a great holiday season," said Mr. Sullivan, the 1,450-store chain's chief executive officer.

Mr. Sullivan said the reports of credit problems were the result of false rumors that some 80 percent of the chain's inventory was tied up in "hip-hop" apparel -- a brightly colored, baggy style of clothing that never lived up to its hype as a fashion trend.

"If 10 to 15 percent of our entire inventory is hip-hop, that would be a lot," Mr. Sullivan said.

The Merry-Go-Round president said that the company is receiving all the merchandise it has ordered, that its cash flow is strong and that all of its bill payments are current.

"Based on our discussions with the factors, they're not advising clients against shipping goods," he said.

In its announcement yesterday, Merry-Go-Round also said it would close about 30 "underperforming" stores as leases expire over the next two years. These would be in addition to the previously announced closings of about 50 Chess King stores that Merry-Go-Round acquired in the spring.

Mr. Sullivan said none of the Merry-Go-Round closings would affect Baltimore-area stores. However, a company source said the Chess King at Hunt Valley Mall would be one of those closed.

In yesterday's interview, Mr. Sullivan said he expects fourth-quarter earnings to be lackluster, but not disastrous, as the company continues to operate with lean inventories and minimal marketing. Merry-Go-Round's next big advertising push will not come until early next year, he said.

Mr. Sullivan expressed confidence that the company's spring merchandise line would spark a comeback. "We've got some things that look very encouraging," he said.

The Merry-Go-Round president said the company has become aware that while it has retained a strong market share among high school-age customers, its appeal among 18- to 25-year-old shoppers has eroded in recent years.

"That's one of the things we are targeting in the marketing campaign for spring," Mr. Sullivan said. "We had a broader audience a couple of years ago. . . . We want to go back and broaden that appeal."

Otto Grote, the retail analyst at Derby Securities in New York, said Mr. Sullivan's strategy made him "very nervous," especially in view of the generally upbeat expectations for this holiday season and the uncertain economic prospects for next year.

"This way he doesn't get any meat on his ribs from Christmas," said Mr. Grote. "By the time spring comes, if you have enough down in this up-and-down economy, the company might face more serious problems."

But Lynn Sawyer, an analyst for Natwest Securities in New York, said it was unrealistic to expect a turnaround in the company's merchandising strategy for the holidays when it went through a major restructuring just two months ago.

She said she thought the reports of credit problems were "overblown"

and that most of the factors who met with Merry-Go-Round officials early this week had come away satisfied with its plans.

Nevertheless, Ms. Sawyer said Merry-Go-Round would be under heavy pressure to generate positive sales momentum in early 1994.

"Next year will be a key year in this company's history," she said.

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