Hechinger debt further downgraded

September 08, 1995|By Ross Hetrick | Ross Hetrick,Sun Staff Writer

No stranger lately to bad news, Hechinger Co. was told yesterday that $338 million of its debt was further downgraded by Standard & Poor's Corp., with the rating agency saying the Landover-based home improvement chain can't effectively fight its competition.

"The action reflects the company's inability to thwart competitive inroads into its market place, as evidenced by continuing poor operating results and market share losses," the S&P report said.

And while the company disputed the report and said it is fending off the interlopers, analysts say they agree with S&P's assessment and see a continuing slide for the 114-store chain.

The S&P action reduces the rating on Hechinger's senior unsecured debt to BB-minus, from a BB-plus and changes the rating on its subordinated debt to B from BB-minus.

S&P's ranking ranges from the highest rating of AAA to the

lowest rate of D, with anything below BBB considered not investment grade, or "junk" in the parlance of Wall Street. Hechinger's debt has been rated below BBB since February.

S&P cited Hechinger's decision to cut back capital spending for new stores to compete with Lowe's and Home Depot.

It also cited a 5 percent drop in overall sales during the first six months of its fiscal year, and a double-digit plunge for its Home Quarter's (HQ) Warehouse format.

"This is especially significant because the majority of capital spending has been devoted to HQ, a format that represents the company's primary response to competitive inroads," the report said.

S&P said Hechinger will not see operating improvements in the near term.

The company stock reacted by dropping 25 cents yesterday, closing at $5 a share for its Series A stock and remaining unchanged at $5.50 a share for its Series B.

The rating report comes on the heels of an earnings report last month that showed net income dropped 57.5 percent in the second quarter ended July 29 to $9.1 million, down from $21.4 million for the same period a year ago.

While acknowledging that the downgrading was disappointing, W. Clark McClelland, Hechinger executive vice president, minimized its impact. Hechinger's strong balance sheet, with more than $100 million in cash, means it has no immediate need to borrow additional funds. "It's an irritant, not a factor," he said.

However, he disputed S&P's contention that it was losing market share to Home Depot and Lowe's, saying the rating firm was looking at the national level rather than the individual markets in which Hechinger operates, primarily the mid-Atlantic and Midwest.

"Our focus has been on protecting market share in existing markets," Mr. McClelland said. "We're not losing market share in existing markets."

But two analysts said they agree with S&P and see a further slide for Hechinger's.

Neal Kaplan, an analyst with Scott & Stringfellow Inc. of Richmond, Va., said he was particularly troubled by Hechinger's decision to close 14 stores in North and South Carolina, where they had a long presence.

"I think that raises the question of why won't that happen, or why shouldn't we expect that to happen . . . in other areas, like D.C., or Tidewater [Virginia] or Detroit, or Baltimore, places where they had been first and had the lead," he said.

Kenneth M. Gassman, a retail analyst for Davenport & Co. of Richmond, said Hechinger is also hobbled by older, smaller stores that are "landlocked" by shopping centers and can't be expanded.

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