Hechinger expanding to Mexico

August 18, 1994|By Jay Hancock | Jay Hancock,Sun Staff Writer

Hechinger Co., the Landover-based home-center chain that has been growing across the East by a dozen warehouse-style stores a year, disclosed yesterday that it will make a geographic and cultural leap by opening four stores in Mexico City next year.

The move offers huge opportunities but also risks. The Mexican market for do-it-yourself home goods is enormous, although nobody seems to have gauged it precisely. Hechinger won't disclose its own measurement.

Mexican homeowners are numerous. They typically don't have mortgages, so often they aren't as cash-strapped as their U.S. counterparts. And they buy home goods mainly from the kind of small, mom-and-pop hardware stores that have proven vulnerable to home-center superstores in this country.

"Mexico City has approximately the land size of Los Angeles and approximately the population of Canada," said W. Clark McClelland, Hechinger's executive vice president and chief financial officer. "We just see it as a tremendous opportunity."

But placing a store in the wealthy Mexico City suburb of, say, Tecamachalco will offer challenges that opening one in Silver Spring doesn't.

Business laws and real estate practices are different. Homeowners don't buy the same things. Little lumber is used for building in Mexico City, for example. Lawn and garden products vary. So do decorating tastes.

"It is an enormous undertaking," said Kenneth M. Gassman Jr., who follows Hechinger's stock for Davenport & Co. in Richmond, Va. "It's going to take a lot of focus, concentration and energy in order to make the Mexican operation successful."

Mr. Gassman worries that perhaps Hechinger's U.S. operations will suffer as a result. The company's Hechinger Stores division, which operates units in Philadelphia, Baltimore and Washington, in the midst of a turnaround," he said. "This could divert energy from the turnaround that is occurring."

Hechinger will run up against other U.S.-based competitors, too. Home Depot, based in Atlanta, intends to operate as many as 50 Mexican stores. The company is still preparing to open its first, said Home Depot spokesman Jerry Shields.

But one analyst said there's enough room in Mexico for Hechinger and several other home-center superstore chains, including a Mexico-based outfit that already operates two warehouse stores in Mexico City.

"There's no reason they can't compete against anybody down there," said Neal Kaplan, a retail analyst with investment house Scott & Stringfellow Inc. in Richmond. "I don't think it would hurt them that badly if Home Depot or Lowe's or somebody else goes in there, because there's so much opportunity."

Hechinger's Mexican stores won't open until fall 1995, Mr. McClelland said, and aren't expected to contribute to earnings in the first year of operation.

Several U.S. Hechinger managers have been living in Mexico for the last six months, Mr. McClelland said. The company intends to have half its Mexican staff composed of U.S. citizens, he added.

"Our approach is to start with a team with many years of experience in Hechinger in the U.S. and then supplement that" with local talent, he said. "We're recruiting actively."

The outlets will be operated by the company's Hechinger Stores unit, which is headed by Kenneth J. Cort. They won't use the Hechinger name, but officials aren't revealing the Mexican trade name yet.

The stores will be modeled on the Hechinger division's newest superstore, which opened several weeks ago in Laurel.

Mr. McClelland said he expects each Mexican location to generate more than the $17 million or $18 million in annual sales garnered by the Hechinger Stores division's biggest U.S. units.

Also yesterday, Hechinger reported a 19.6 percent increase in profits for its second quarter, to $21.4 million, or 48 cents per share. The result, coming in the most important period of the year for home-center retailers, exceeded Wall Street's expectations.

Mr. Kaplan, who had been on the high side of predictions with 47 cents a share, said he was pleased that Hechinger's Home Quarters division continues to perform well and that the company has lowered its operating costs.

Operating expenses for the quarter that ended July 30 were 17.2 percent of sales, down from 17.7 percent in the same quarter last year.

Hechinger Co.

Landover

.. .. .. .. .. .. .. .. .. .. Ticker .. .. .. .. Yesterday's

.. .. .. .. .. .. .. .. .. ... Symbol .. .. .. .. Cls... Chg.

.. .. .. .. .. .. .. .. .. .. . HECHA .. .. . 13 9/16 . +5/16

Period ended

July 30 .. .. .. .. .. .. .. . 2nd qtr. .. .. Year ago ..Chg.

Revenue .. .. .. .. .. .. .. . $708,900 .. .. $609,200 +16.4% Net Income .. .. .. .. .. .. . $21,400 .. .. $17,900 . +19.6%

Primary EPS .. .. .. .. .. ... $0.48 .. .. ... $0.41 . +17.1%

.. .. .. .. .. .. .. .. .. ... 6 mos. .. .. . Year ago . Chg.

Revenue .. .. .. .. .. .. .. $1,280,000 . $1,090,000 . +17.4%

Net Income .. .. .. .. .. .. .. $26,000 .. . $21,100 . +23.2%

Primary EPS .. .. .. .. .. .. . . $0.60 .. .. $0.50 . +20.0%

Figures in thousands (except per share data.)

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