Lucky May Not Be Able to Avoid Unwanted Offer
Back in the 1960s, Lucky Stores made a couple of bold moves that put it on the leading edge of retailing. It started slashing prices at its California food stores and nurturing a new concept with its membership discount department stores.
Unluckily, competitors through the years proved capable of beating Lucky at its own game.
As a result, food store performance has been lackluster for some time, and results at the company’s 80 Gemco membership stores have turned downright disastrous of late, depressing overall corporate earnings.
It is small wonder, then, that the financially weakened parent of Lucky and Food Basket markets has drawn the unwanted attentions of a Wall Street suitor, Asher B. Edelman, known for quick corporate strikes and sizable profit takings. Edelman, who with a group of investors holds a small stake in Lucky, has offered $35 a share in cash for all remaining shares in a bid valued at $1.77 billion.
Analyst Doubtful
“I’m not sure Lucky has a lot of options, quite honestly,” said Jeffrey Atkin, who follows the Dublin, Calif., company for Kunath, Karren & Rinne, a Seattle money-management firm. “They can try to do a leveraged buyout, find a white knight or scream and yell that the offer is too low.
“Lucky has shed some unproductive assets, but the immediate problem today is Gemco, and it’s about 25% of sales. . . . I think there’s a 75% to 80% chance that Lucky will go away.”
Indeed, one observer said the company, which had 1985 revenue of $9.4 billion, is probably “worth more dead than alive,” and Wall Street watchers say Edelman might simply liquidate the lot if his quest is successful.
Lucky’s reaction to Edelman, who had requested a response by last Friday, has been cool. Late last week, Lucky President and Chief Executive John M. Lillie sent a letter to Edelman indicating that he would “be unable to meet with you prior to our board meeting to be held Oct. 2. . . . If a meeting will be helpful at that time, we will call you.”
Lucky shares, which were the sixth most active on the New York Stock Exchange last week, closed last Friday down 37.5 cents at $35.625.
Wall Street observers speculate that Lucky might restructure the company, selling off assets and using the proceeds to buy back shares and strengthen its stock price. Lucky officials would not comment on the validity of that idea.
Whether or not Lucky strikes out in its expected anti-takeover defense, Gemco at least is likely to be a casualty.
If so, it will be a hapless end for what was a trend-setter two decades ago.
Lucky took its first step into general merchandising in 1960, when it bought a controlling interest in a membership store in Anaheim. As was common in California after World War II, this store--called Gemco--was run as a group of concessions under one roof. By having a membership format, the store was able to get discounts on high-volume purchases and pass the savings to customers.
By the end of the 1960s, Lucky had acquired more Gemcos, bought out most of the concessionaires and started to expand. The early years were rough, but eventually the profits began to roll in. For many years, the operation flourished in a climate of heady population growth and minimal competition.
Enter the promotional 1980s, however, complete with discount chains, membership stores and warehouse stores duking it out for market share. Whereas Gemco had once clobbered K mart, suddenly Target Stores, an upscale discounter, and Price Club, a membership warehouse store, were beating up on Gemco. At company headquarters in Dublin, southeast of Oakland, executives were up to their ears in a retrenching after some unsuccessful diversification efforts and failed to spot the trouble. Gemco floundered.
This summer, Lucky bolstered management at Gemco, which had a $28-million pretax loss for the year’s first half. It promoted President Stanley Brenner to the new post of chairman and named as his successor Samuel J. Parker, formerly head of Lucky’s automotive division.
Analysts viewed this as a positive sign in an otherwise bleak picture, noting that the team would oversee an upgrading of the stores’ appearance and the quality of merchandise.
One supermarket executive said, however, that Lucky would probably grant Brenner and Parker at most a couple of years to achieve a turnaround.
With a corporate raider lurking, though, the pace will almost certainly quicken. “Even if they were operating in the most benign climate, it would take a number of years to introduce the quality of merchandise mix that they want to go forward with and the necessary management systems to get it well positioned,” said John Kosecoff, an analyst with First Manhattan in New York.
Not a Benign Climate
But this clearly is not a benign climate. With profits shrinking and a suitor in the wings, Lucky is under pressure to enhance shareholder values by selling assets. And, analysts noted last week, even if Lucky thwarts Edelman by converting to private ownership, the leverage required to complete the transaction probably would rob Lucky of the luxury of time to turn the Gemco division around.
Estimates of Gemco’s possible worth range from below $600 million to $850 million--assuming that another company would want to take on the task of turning around an operation with gigantic stores, heavy competition and a clouded image.
One option might be to sell stores piecemeal or to shut them down. That would represent another blow to retailing in Southern California, which has seen several discount chains, most recently Zodys, close in the last few years.
Meanwhile, the outlook isn’t so bright at Lucky’s supermarkets, either.
“Early on, they were the first to do everyday low pricing,” said Ronald Rotter, an analyst with Seidler Amdec Securities in Los Angeles. “Now they don’t have a unique niche.”
Analyst David Jackson of Morgan, Olmstead, Kennedy & Gardner in Los Angeles noted that Lucky targets the lower end of the market. “To make a decent return, they have to keep low overhead,” with the result that many stores are untidy and understaffed, he said.
Moreover, Lucky has been playing catch-up behind Vons and Ralphs, which have aggressively opened bigger stores with large specialty departments, such as delis, bakeries and fish counters.
Kosecoff of First Manhattan defended Lucky’s strategy, however.
“As you get into stores that are so decidedly large, you can take on certain risks in terms of real estate and overhead,” he said. “I think Lucky has taken a very prudent route to offer an economic-size format that offers efficiencies but also can provide convenience and everyday low prices.”
Lucky operates 575 supermarkets, including Lucky in Orange and Los Angeles counties, Food Basket in San Diego, Eagle stores in the Midwest and Kash n’ Karry in Florida.
The company also has a small specialty retail operation, including Kragen Auto Parts and Hancock fabric stores.
Over the past few years, Lucky has shed some troubled units bought in a flurry of diversification. Those included sporting goods and tire stores and a restaurant division. It also divested some off-price women’s apparel shops, another innovation that backfired.
“The company was really extremely innovative and pioneered many retailing concepts in the later ‘60s and early ‘70s,” analyst Rotter said. “In the ‘80s, they . . . didn’t maintain that creative, innovative thrust.”
Lucky’s big problem is that it is “a good operating company but is short on the merchandising side,” Atkin said, noting that the company does have some reasonably profitable food divisions with good market share.
3rd in Southland Market
In Southern California, where Lucky runs third in market share behind Ralphs and Vons, the company has 160 food markets, 48 Gemco stores, 75 Kragen outlets and distribution centers in Buena Park and Irvine. Of the company’s 68,000 employees, an estimated 25,000 to 30,000 work in the area, according to Kenneth W. Cope, Lucky vice president for administration.
Whether Lucky would be worth more “dead than alive” to a buyer hinges in part on real estate considerations. Of the company’s 1,468 stores, only 113 are owned outright. The rest are leased, and a new owner of Lucky could potentially sell leases back to the owners or put other operations into the locations.
“It’s a difficult thing to put a real estate valuation on without looking at specific leases,” Kosecoff said, adding that Lucky’s holdings aren’t nearly on the same scope as those of Safeway Stores, the world’s largest supermarket chain, which recently agreed to a $4.1-billion leveraged buyout.
“You have to regard it as a going concern. The primary focus has to be the existing franchises and the stable cash flow that can be generated by their going concerns.”
But lately, analysts say, Lucky’s value as a going concern has been diminishing.
