Federated Group Posts $5.2-Million Loss for the Year

Federated Group, a fast-growing consumer electronics retailer that has suffered the double blow of a collapsed Texas economy and fierce competition in Southern California, reported a $5.2-million loss for the fiscal year ended March 1.

The results were attributed primarily to a $6-million loss for the year’s final quarter, which was partly offset by a gain resulting from an accounting change. The loss occurred despite an 18% rise in sales, to $429.9 million from $363.6 million the year before, the company said. For the previous year, the company reported net income of $10.7 million.

As a result of the financial troubles, the retailer, based in City of Commerce, has hired Goldman, Sachs & Co. as a financial adviser and been forced to restructure its $48-million credit line “on a slightly longer-term basis,” Chairman and Chief Executive Wilfred Schwartz said Monday in a telephone interview.

Schwartz said Goldman, Sachs helped in restructuring the debt over the last week or so, reaching a final agreement after the stock market closed on Friday. Los Angeles-based Security Pacific National Bank manages the credit line for a group of foreign banks, he added.

The loss, which was disclosed Saturday, resulted from the company’s aggressive expansion program over the past four years, which took the retailer from 15 to 65 stores in California, Arizona, Texas and Kansas, Schwartz said. The growth in stores has accounted for sizable revenue growth, but at the expense of profitability.

Analysts had anticipated that Federated would show a full-year loss. Five months ago, the company reported a third-quarter loss of $575,000, which Federated blamed on the Texas operations.

Decisions Defended

Schwartz defended the chain’s expansion of 25,000-square-foot superstores, noting that small Southern California retailers such as Pacific Stereo have fallen victim to an industry shakeout in the past year.

“What motivated us to begin an accelerated expansion program (four years ago) was the identification that this industry would attract many new participants . . . and that it was critical for us to reach a critical mass of size and market share,” Schwartz said. “The recognition was that if you didn’t get big, you’d get devoured.

“Unfortunately, we picked the state of Texas to create 20 brand-new superstores, and that was the crux of our problem.” Federated has closed smaller stores there in favor of new superstores, which have suffered depressed sales because of the overall decline in Texas’ oil-dependent economy, Schwartz said.

Ron Rotter, an analyst with the Los Angeles investment firm of Morgan, Olmstead, Kennedy & Gardner, said the company has also lost market share in Southern California to Circuit City Stores, a Richmond, Va., retailer that has backed rapid growth with a $10-million advertising campaign.

However, Schwartz contended that “Circuit City is not our problem. There’s plenty of room for two merchandisers in this city. Our problem is that we’ve been distracted by problems in the Texas market.”

Rotter agreed that Southern California can support two large consumer electronics retailers. He said Federated “would be a very viable acquisition for somebody like a K mart or Sears or Dayton Hudson” that wanted to get into the business by achieving “a critical mass of stores right away.”

Schwartz said that the company has trimmed operating costs in Texas and that “overall, we expect to achieve a moderate level of profitability in the current year.” He added that expansion “will be minimal” this year as the company concentrates on strengthening existing operations.