Fixing Hechinger Competition: With Home Depot stores cropping up on every corner, the once-leading Hechinger has seen sales decline consistently, and even its chief executive expects the erosion to continue this year.

March 23, 1997|By Liz Bowie | Liz Bowie,SUN STAFF

Hechinger Co. met Home Depot Inc. in the ring four years ago -- and nothing has been the same since.

There has been no escape from the orange and white signs popping up across the landscape, now competing with 80 percent of Hechinger stores, and no escape from the resulting financial woes.

Wall Street, with its emphasis on quarterly results, sees in Hechinger a company that has posted three consecutive annual losses, has declining sales and a poor bond rating and has no obvious takeover bid on the horizon. The result: Hechinger A shares have sunk from $16 in 1994 to under $2.

And Chairman and Chief Executive Officer John Hechinger Jr. doesn't offer much reassurance for the short term: "With the level of store competition coming, I expect in 1997 we will continue to have some sales erosion."

After several years of failed fix-it programs, the question on analysts' minds today is this: Will there be a Hechinger chain in three or five years?

Hechinger takes the long-term view, believing that the company must simply ride out the competitive storm and focus on doing what it does better. "We just have to absorb this competition," he said.

As proof, he points to the Baltimore market, where Hechinger stores are showing signs of revival after competing with Home Depot for several years.

"We've got to settle it down this year and build the business back up. Now you have to understand, I don't expect world-class results in 1997," he said. "We have the resources to get through do things to be aggressive in getting our business back."

As part of its strategy to reverse things, Hechinger today will launch an aggressive customer service program that includes hiring and retraining sales staff in its Baltimore stores and offering customers discounts when the service doesn't live up to standards.

First tested last fall in Detroit stores, where sales lagged behind most other stores, the program has increased sales to make them among the best in the 117-store chain, according to the company.

In addition, the company opened Better Spaces in Albany two weeks ago -- a store that concentrates on home design rather than nails and hammers.

Neither initiative impresses Sheldon Grodsky at Sheldon Grodsky Associates, a stockholder and small securities

brokerage firm in South Orange, N.J. "They have rearranged the deck chairs on this Titanic many times in the last several years," ++ he said.

Grodsky and several other analysts said that Hechinger will easily survive the next couple years, but in the long term they don't see Hechinger as a national player without a change in leadership in the company.

"I don't think this company is in any imminent danger of going out of business next week," said Kenneth Gassman at Davenport & Co. With $36 million in cash, a $200 million line of credit and $200 million in unfinanced real estate, there is nothing that would force the company into financial crisis over the next several years.

But it does have problems:

Same-stores sales have been negative every month since March 1995, with the exception of three months when they were up 1 percent or flat. Sales at stores open a year are a crucial measure of a retailer's health.

All of its bonds carry junk -- below investment grade -- ratings. Wayne Stefurak at the S&P Ratings Services, downgraded the company's bond rating to B-plus in February 1996. "It's a low speculative grade company with a higher risk of default," he said.

The company's book value -- assets minus liabilities -- has fallen from a high of $12.04 in 1992 to $9.44 in 1996.

Stock being sold

In addition, members of the Hechinger family, with large stock holdings in the company, have been selling stock at a considerable pace since 1993. While those family members are not members of the board or involved in the daily operations of the company, some analysts see it as a signal that family members are losing faith that the company will to return to profitability.

Three Hechinger family members, including the wife of John Hechinger Sr. and two of her daughters, Sally Hechinger Rudoy and Nancy Hechinger Lowe, have each sold nearly half their holdings -- about 370,OOO shares. And members of the Richard England family, which is related by marriage to the Hechingers, have also sold substantial quantities of stock. Richard S. Gross, vice president and controller, said that England has given substantial amounts of money to charity in recent years.

The family members declined to be interviewed. But Gross, speaking for them, said: "I don't think Nancy and Sally and what they do with their stock is of any significance on any point."

He said that the amount sold is a small portion of the 11 million shares held by the England and Hechinger families.

Analysts said that the sales of the stock are not necessarily unrelated to the performance of the company.

"Anytime major shareholders are selling, you have to look very hard at the transactions. These are spouses of major shareholders. I would raise the question," Gassman said.

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