Restructuring Bringing Results, Chairman Says : Carter Hawley on an Upswing
During several topsy-turvy years, Carter Hawley Hale Stores has been beset by changing fortunes and harsh criticism, but Philip M. Hawley, its chairman and chief executive, remains unwavering.
Hawley is quietly but fiercely determined that the path chosen for his company is the proper one. And, now that the Los Angeles-based retailer’s costly anti-takeover battle is well behind it, Wall Street is coming around to his way of thinking.
Most analysts say the company’s years-long restructuring effort and new emphasis on customer service are starting to bear fruit. With one or two exceptions, “sell” orders have been changed by investment advisers into “buy” recommendations.
The shift comes in a seesaw environment for retailers. Despite the enormous spending potential of two-income families, consumers are heavily in debt and have curbed purchases in recent months. Retail stocks wallowed for a time before recovering somewhat, but in many cases the strengthening resulted from rampant merger speculation.
In that regard, Carter Hawley has nothing to fear. Actions taken to ward off the Limited, a Columbus, Ohio-based specialty merchant, made the company effectively immune from another takeover threat. As a result, analysts say, it can concentrate on running and improving its business.
One of the most upbeat opinions about Carter Hawley comes from Thomas P. Farley of Salomon Bros. in New York, who said: “We believe that the turnaround at Carter Hawley Hale is real and project that earnings per share should rebound sharply over the next three to five years.”
An earnings upswing is certainly imperative if the retailer is to get back into investors’ good graces. Analysts have been skeptical in recent years that Carter Hawley could accomplish all it set out to do. In the past, its critics have characterized the company as a laggard frequently saddled with stale inventories and a murky merchandising strategy.
Such criticism spurred Hawley in the late 1970s to devise a course that would position the company to compete effectively in an increasingly risky environment of uncertain growth potential. He now believes that, despite the Limited’s “diversion,” the company is on track.
“We’re very satisfied with where we are, essentially because the big strategy implementations--the ones that would take some time and be difficult and, more important, be costly--are now behind us,” the 60-year-old Hawley said Wednesday in an interview at the company’s headquarters.
In 1980, the company began to implement several key changes designed, as Hawley said, to “forge a corporation . . . out of a loose confederation” of divisions that had been acquired in the 1970s. By that time, the company that started as Broadway-Hale, a regional retailer with $250 million in sales in 1969, had grown to 11 divisions with outlets in the United States and Canada.
The moves involved restructuring the company’s three largest department store divisions, establishing a corporate marketing department, organizing a buying office in New York to develop private-label merchandise and, perhaps most important, setting up a computer center in Anaheim to handle billing and keep track of inventories.
Being an old hand at the retailing game, Hawley was well aware that his strategy of forgoing short-term gains for long-term benefits might make his company more vulnerable. In April, 1984, the Limited launched an unsolicited offer. Hawley and the company spent months fending off the suitor, getting themselves deeply into debt; acquiring an investor in General Cinema, which controls 37% of Carter Hawley, and unloading the Waldenbooks division in what strikes many in retrospect as a fortuitous event because of the turmoil in the book business.
Having tackled the company’s inner workings, Hawley set out to make its retail outlets more appealing to customers. In department stores, the company took the risk of lowering its gross margins by several percentage points as it priced goods more competitively and took faster markdowns to clean out slow-moving merchandise.
Carter Hawley’s markdowns as a percentage of sales have risen more rapidly than the industry average and stood at 20% in 1984--more than double the 1979 figure of 9.5%. Hawley estimated that the pretax cost of the markdown moves alone was “something over $100 million.”
Analysts say the company’s gross margins, which are key to profits and rise or fall on the basis of markdowns, have been increasing this year and probably will settle at about 29%--compared to a department store average of about 33%. The improvement comes largely from the increase in sales of private-label goods handled by the New York buying office. The gross margin on that merchandise is 4 to 5 percentage points higher than on traditional goods, said David Jackson, an analyst with Morgan, Olmstead, Kennedy & Gardner in Los Angeles.
Because of the unsettled retail environment, not everyone is enamored of Carter Hawley. Bernard Sosnick, an analyst with L. F. Rothschild, Unterberg, Towbin in New York, in September issued a “sell” recommendation.
“Retailing is a very tough business in which promotional activities have intensified,” he said. “Shoppers are very price sensitive and are waiting for sales events. That’s a very hard environment in which to operate successfully, and Southern California has been probably the most competitive market of all.” About 70% of Carter Hawley’s department store sales are generated in California.
Sosnick added that the goal of reducing markdowns might prove elusive if tight control over inventories is allowed to lapse. The company said it is comfortable with current inventory levels, which are running about 13% above a year ago. Last year at this time, they were 30% above the previous year’s.
Hawley’s pet concern right now--”I’m known as a nut on this around the company”--is customer service. Borrowing a page from Seattle-based Nordstrom and its own Neiman-Marcus, the company has been testing various forms of incentive compensation for its sales personnel.
During 1986, all the company’s about 30,000 sales personnel will be put on commission instead of salary compensation.
Hawley praised the company’s Weinstock’s division for its successful test of the program. According to analyst Farley, the test stores have achieved 17% higher sales than stores without any form of incentive compensation.
“It’s reasonable to conclude that those people will have an incentive to learn the merchandise, learn how to sell and service the customer,” he said.
Of the plan, analyst Jackson said: “Carter Hawley is ahead of the pack in doing this. To compete successfully in the type of retail environment we’re in, especially with new retailers in off-price areas, service for a department store has got to be improved, and this is the way to do it.”
As part of the movement to a service orientation, the company also is starting to train personnel at a company education center that will be moved by next February to downtown Los Angeles from its current facility near the Anaheim computer center. In addition, it will implement over the next three to four years a program to increase the number of full-time salespeople and will hire more clerks to tackle the mundane tasks--such as cleaning out the dressing rooms--that keep sales personnel too busy to serve customers.
All these changes add up to an improved earnings picture, many analysts say.
Generally, they agree that earnings per share will be in the range of $2.10 to $2.25 for the fiscal year ending Jan. 31, 1986, compared to 83 cents in the previous year. Jackson projects earnings of $3 to $3.25 for the next year and something over $4 for the year after that.
The stock is trading on the New York Stock Exchange at about $30 a share. It “would be significantly higher if Wall Street had as much confidence in their future earnings as I have,” Jackson said.
“As each quarter goes by, we’ll see more confidence from the financial community,” he added. “They’ve done all the restructuring that needed to be done and have paid the price to do it. From here on in, I’d expect them to reap the rewards.”
Hawley also expresses confidence. “We should be prepared to perform better than the industry next year. The biggest problem we face as a company is continuing the process of getting our organization outwardly focused on the customer.” CARTER HAWLEY HALE AT A GLANCE
The company operates 297 department and specialty stores, including the Broadway, Emporium Capwell, Weinstock’s, Contempo Casuals and Neiman-Marcus. Financial Data For the first six months of the fiscal year (in millions)
1984 1985 Sales $1,543.3 $1,710.5 Pretax earnings (loss) from continuing operations ($24.6) $32.2 Net earnings $48.1 $19.3
