Lucky to Close Gemco, Sell Most Stores to Dayton Hudson
Lucky Stores said Thursday that it will close its ailing Gemco discount store chain by the end of the year in a move that will leave its 9,000 employees in Southern California without jobs.
The company said it will sell 54 of its 80 Gemco locations for $374 million to Dayton Hudson, which said it will reopen them as Target discount stores in the middle of next year.
Lucky’s decision to close the 70 stores in California and 10 in Arizona and Nevada was part of an effort to restructure Lucky and fend off an unwanted takeover attempt. Gemco employs a total of 14,000 people.
“We recognize that closing our Gemco division is a painful step,” said Lucky Chairman and Chief Executive John M. Lillie. He said the company was developing programs to assist employees “including an extensive job placement service and severance benefit plans.”
Gemco, based in Buena Park, operates seven stores in Orange County; one each in Anaheim, Fountain Valley, Huntington Beach, Mission Viejo Santa Ana, and two in Fullerton. Each store employs about 168 people. In addition, there are about 1,000 workers at the corporate headquarters and distribution center in Buena Park.
Lillie’s assurances were little consolation to some union leaders. “We’re horrified that they are doing this on such short notice,” said Andrea Zinder, an official at Local 770 of the United Food and Commercial Workers, which represents 1,000 Gemco employees in Los Angeles, the San Fernando Valley and the San Gabriel Valley. Zinder said that some workers had already received layoff notices and others had been told that “there will be no Gemco operations after Oct. 19.”
Zinder said she doubted Target would rehire Gemco’s unionized workers. None of Target’s employees belong to unions.
Shoppers expressed disappointment at the prospect that Gemco stores will be closed.
At a Gemco store in San Gabriel, consumers said they would miss the chain. “They have really good prices for food and clothing. Anything I need I can find here,” said Hugo Barrientos, 23, of Alhambra.
Priscilla Stone of Rosemead said she has shopped at Gemco for 15 years. “It has the best prices.”
Lucky also disclosed that it might shed its three profitable specialty store units and concentrate its efforts on its supermarket operations. Lucky operates 575 supermarkets in seven states, including the Lucky chain in Los Angeles and Orange counties.
Lucky said it would “actively explore strategic alternatives for Lucky Stores’ specialty stores operations,” including selling them or spinning them off to shareholders in a move interpreted as a defense against a $1.78-billion takeover offer from New York investor Asher B. Edelman. Those units are Hancock Fabrics stores, Yellow Front stores and its automotive stores, which operate under the Checker and Kragen names.
Edelman accused Lucky’s board of directors of “destroying the company to keep me out.” Edelman said in an interview that he was still interested in the Dublin, Calif., company. “I’m not the kind of guy that just goes away,” he said.
But investment analysts who follow Lucky said the disposal of Gemco was likely to discourage Edelman. Lucky shares fell in heavy trading on the New York Stock Exchange, indicating that investors expect no new bids for Lucky. Lucky closed at $36.50 a share, down $1.25.
Lucky estimated that by the time it has sold all of its Gemco operations, it will get $700 million, with after-tax proceeds totaling about $450 million.
Judith Decker, a Lucky spokeswoman, explained that the total amount reflects the proceeds from the sale to Target, liquidation of Gemco’s inventory and the anticipated sale of the 26 stores not included in the Target transaction.
Decker declined to say with whom Lucky was negotiating, but industry sources have said that the Vons and Ralphs supermarket chains may be interested in some locations, 20 of which are in Southern California.
In closing Gemco, Lucky is eliminating one of its biggest headaches. Founded as Gem Co. by an Anaheim jeweler in 1959, Gemco consisted of two stores when it was acquired by Lucky in 1962. The membership-store chain flourished until recently, when K mart, Target and other discounters captured a share of the market once dominated by Gemco. Gemco was further hurt by a three-month strike by 4,100 unionized workers in late 1984 and an eight-week supermarket strike that began last November.
For the year ended Feb. 2, Lucky reported that Gemco saw a 30% drop in pretax operating profits to $15.9 million on sales of $2.43 billion. For the six months ended Aug. 3, Lucky said Gemco had a $28.1-million operating loss on sales of $1.14 billion.
“They should have gotten rid of Gemco years ago,” said David Jackson, an analyst who follows Lucky for the Morgan, Olmstead, Kennedy & Gardner investment firm. Jackson said that if Lucky sold its specialty stores, it would emerge as “a cleaner company with a lot less negatives.”
Target, a unit of Minneapolis-based Dayton Hudson, is buying 54 Gemco stores, 28 of them in Southern California. George Hite, a Target spokesman, said the stores will not open until mid-1987, since it will take six months to remodel them. The 12 Gemco locations in the Bay Area would give Target its first Northern California stores, he said.
Kenneth A. Macke, chairman of Dayton Hudson, said in an interview that Target, which entered the California market in 1983, has had difficulty finding attractive locations for additional stores. “Good sites just haven’t been available,” he said. “This is a great opportunity for Target.”
Macke declined to estimate how the acquisition of Gemco stores would improve Target’s share of the discount merchandise market, although he said published reports that it will approach 50% were “ungodly high.”
Asked if Target might offer jobs to displaced Gemco workers, Macke said: “We did not acquire people or stores, we acquired real estate.” Target has 247 stores in 22 states, including 37 in Southern California. Last year, Target had an operating profit of $277.8 million on sales of $3.9 billion.