Wickes Cos. Sets Aside $20-Million Reserve for Carpet Problem

After a four-month investigation, Wickes Cos. said Tuesday that it has set aside a $20-million pretax reserve--far less than analysts had anticipated--to cover costs arising from the sale of substandard carpeting by a Georgia subsidiary.

The reserve, which totals $11.2 million after taxes, contributed to a sharp earnings decline for the diversified Santa Monica-based manufacturer and retailer. Net income for the quarter ended Aug. 1 was $18.9 million, down 30% from $26.9 million in the same period last year.

At issue was $360 million worth of carpeting with polyvinyl chloride backing that a division of Wickes’ Collins & Aikman unit sold to commercial customers over a 10-year period. During its investigation, Wickes disclosed that the company’s Dalton, Ga., carpet-making plant had routinely submitted phony test results for carpeting that later was found not to meet some local fire and smoke-density standards.

Wickes learned of the problem in April, three months after buying Collins & Aikman, a New York-based textile company, for $1.16 billion. With $100 million in revenue last year, the Dalton unit accounted for about 10% of Collins & Aikman’s sales.

Analysts said Wickes’ disappointing earnings were overshadowed by the relatively small size of the charge and by auditor Arthur Andersen & Co.’s decision to remove its qualification from Wickes’ 1986 financial statement. The qualification was imposed in April when Wickes told the auditor that it could not estimate the cost of its newly discovered carpet problem.

“The unqualified opinion just enhances the stock’s appeal to institutional investors, some of whom could not own the stock of a company with qualified statements,” said Anthony Pearce-Batten, an analyst with the Legg Mason Wood Walker investment house in Baltimore.

In trading Tuesday on the New York Stock Exchange, the price of Wickes shares rose $2, closing at $20.25. Earlier this month, the company effected a 1 for 5 reverse stock split and moved to the Big Board from the American Stock Exchange.

Wickes Chairman Sanford C. Sigoloff expressed relief Tuesday at being out from under the cloud of the carpet controversy. “We had to take a lot of heat,” he said in a brief telephone interview, adding that the months of uncertainty and investigation were “what had to be done.”

Investigation Costly

Sigoloff took Wall Street analysts to task for their early, high estimates of the company’s potential liability. Initial forecasts ran as high as $360 million to $500 million, although most analysts had scaled back in recent weeks.

Even so, estimates were still on the high side. Pearce-Batten, who said Tuesday that he had estimated the size of the charge “at $30 (million) to $50 million as recently as Aug. 10,” added: “It’s nice to be wrong on issues like this.”

Wickes said in a statement Tuesday that the $11.2-million charge will “cover all known and anticipated costs and liabilities associated with the carpet situation.” Sigoloff said “the majority (of the money) went into the investigation,” with only a small portion used to replace carpeting.

Edmund M. Kaufman, a Wickes director who headed the investigation, has said in the past that the company was contacting as many customers as it could locate to determine whether any of the carpeting posed a safety hazard. Sigoloff’s comment and the relatively small size of the charge indicate that only a small amount of carpeting was replaced.

Two lawsuits against Wickes are still pending in connection with the carpet situation.

Sigoloff blamed the earnings decline largely on softness in the domestic auto industry, to which Wickes supplies a variety of products, and in the company’s apparel and hosiery group.

In addition to the carpet charge, the second-quarter results reflected a pretax gain of $20 million on the sale of various subsidiaries as well as tax credits. Sales rose to $1.45 billion from $1.1 billion.

For the first half, the company earned $138.9 million, including a pretax gain of $139.5 million from the sale of assets plus tax credits. That compared to profit of $47.5 million in the same period a year ago. Sales rose to $3 billion from $2.1 billion.