Philip Hawley Stole a March on His Critics

What’s the real story behind the roller coaster behavior in the stock of Carter Hawley Hale Stores this week, after management turned down a $60-a-share takeover offer and announced the splitting of Carter into two companies? That Carter Hawley Chairman Philip M. Hawley got a bum rap from Wall Street, and investors who sold out in the wave of instant analysis and quick-trigger trading that followed Carter’s announcement last Monday made a mistake.

Now the stock is rising as Wall Street’s analysts, arbitrageurs and money managers are taking a second look--as well they should--at the company’s plan to give its stockholders $17 in cash and shares in two companies, one owning the Neiman-Marcus, Bergdorf Goodman and Contempo Casuals part of Carter Hawley, and the other owning the Broadway, Thalhimers, Emporium Capwell and Weinstock’s department store part. Carter Hawley closed over $50 on Thursday, up more than $1. It has been recovering all week from the $10-a-share midsession plunge to $47.50 that it took on Monday when analysts cried that Hawley was leaving a lump of coal in his shareholders’ stockings.

Flubbed the Arithmetic

The Wall Streeters were disappointed that the Los Angeles-based department store company was going to turn away a takeover offer from the Columbus, Ohio-based combination of Leslie H. Wexner, chairman of the Limited Co., and shopping center developer Edward A. DeBartolo Sr., and they flubbed their arithmetic. Now, based on financial and business plans that Carter Hawley filed this week with the Securities and Exchange Commission, it is relatively simple to calculate a value of more than $60 on the shares of the two new companies plus the $17 cash distribution. (Of course, since the splitting of Carter Hawley and the distribution of cash and shares won’t occur before at least April, the present company’s stock price may not rise to $60 immediately.)

But the higher value could have been calculated even before the release of the SEC document, and if not arithmetic, then at least logic might have indicated that the restructuring deal was not a bad one for shareholders. For one thing, Wexner and DeBartolo--who had purchased 546,000 shares of Carter Hawley--would have screamed bloody murder if the deal weren’t good for them. Instead they thanked the Carter Hawley board for its consideration and kept quiet.

Wall Street Muttering

The real reason the market didn’t correctly reflect Carter Hawley’s new value was that the traders, arbitrageurs and analysts thought at first that Philip Hawley was merely defending his job. The Wall Streeters had wanted the cash takeover, and more than that, they wanted Neiman-Marcus, Bergdorf Goodman and Contempo Casuals separated from Carter Hawley’s department stores.

Stocks of such up-scale merchandisers usually sell at a higher price-earnings ratio than do more middlebrow department stores--Nordstrom’s at 27 times earnings, for example, compared with Mercantile Stores at 14 times earnings. And Wall Street, always eager for a new hot stock to sell, blamed Phil Hawley for keeping them from a tidy bit of business.

Analysts criticized his management and muttered that General Cinema--the company that owns a critical block of Carter Hawley convertible preferred stock--was unhappy with Hawley’s management. Statements to the contrary by General Cinema’s Chairman Richard Smith did not stop the muttering. Years of raids and takeovers have emboldened Wall Street, of course, so that analysts and traders simply presume to dictate how a company is structured.

So now Hawley, who has been with the company since 1957 and its boss for the past decade, has responded. He has acted as all the modern textbooks say managers should in giving value to shareholders. He has put Neiman-Marcus and the other specialty stores in a separate company, which General Cinema will control and run. And he has put himself on the line to meet demanding targets for profitability in the newly separate department store company, which according to his filings with the SEC are projected to go from $2.5 billion sales and $36 million earnings in 1987 to $3 billion sales and $118 million profit in 1990.

Poor Hawley, can he succeed with department stores, a form of retailing that some experts and analysts say is going the way of the dodo bird? The good news is those experts may be out of date. Department stores are making a comeback. They have attained better control of their costs than the specialty clothing shops, and their merchandise is drawing customers who want a little better tailored skirt or better fitting shirt than the discount stores sell.

Of course, the department store comeback is no revelation. It was forecast two years ago, in an analysis of retailing presented to the Harvard Business School by Philip Hawley. Now he will get a chance to demonstrate that analysis for Wall Street--and benefit directly. Along with the rest of Carter’s managers, Hawley is taking increased stock in lieu of cash in the restructuring. He who laughs last . . .