If Debt’s a Good Idea, Why Is Bloomie’s for Sale?

What does it mean that some of the country’s largest retail companies, the Allied and Federated department store groups that were acquired in 1986 and 1988 by Campeau Corp., may have to seek protection from creditors?

It means that financial market assumptions of the past decade, that takeovers were healthy and debt was wise, are proving unsound. The assumption was that retail stores could always come up with cash to service debt.

But the Campeau stores (Bloomingdale’s, Jordan Marsh, Lazarus, Rich’s and many others) now say the burden of paying interest on $5 billion of buyout debt may force them into Chapter 11 bankruptcy by the end of January. Another assumption was that stores could be sold and proceeds used to repay debt. But Campeau is having a hard time getting a good price even for Bloomingdale’s, one of the most famous names in retailing.

Other debt-burdened retailers are staggering. R. H. Macy & Co., which went through a leveraged buyout in 1986 and borrowed more last year to acquire Bullocks stores in Los Angeles, said last week that losses are running higher than expected in a “chaotic” retailing climate. Macy Chairman Edward Finkelstein said the company hoped to muddle through by cutting capital spending and refraining from opening new stores until 1991.

So what? So trouble for some means opportunity for others. Retailers less afflicted by debt may take customers away from the troubled and make gains in the stock market, where the focus now is on companies with leading stores in big cities.

Fittingly, the darling of Wall Street in the past year has been Dayton Hudson, owner of the leading stores in Minneapolis/St. Paul and Detroit, as well as the Mervyn’s and Target chains. Dayton Hudson stock is up about 60% for the year--even after nervous fluctuations last week on worries about Christmas sales--and security analysts are high on the company.

Which is curious and instructive because two years ago Dayton Hudson fought off a buyout offer from Dart Group of Landover, Md., and its owners, the Haft family, by calling on the Minnesota legislature for an anti-takeover law--which was duly passed.

Dayton management said the Hafts’ offer failed to reflect the company’s potential, but financial types howled. “For management to stand in the way of people willing to sell is not necessarily looking out for shareholder interests,” said one analyst back then.

But the analyst was wrong. Dayton Hudson has produced rising earnings in the intervening years, boosting the stock price and the return to investors beyond what the Hafts offered. And the company retains its potential and its sales leadership in Minneapolis and Detroit. Had a buyout succeeded, Dayton Hudson might have cut back service and given opportunity to Carson Pirie Scott and Jacobson’s, the runner-up stores in those markets.

Being first is important. “The dominant store in a market enjoys advantages,” explains Will Danoff, who manages a mutual fund of retail issues for Fidelity Investments. “If you’re dominant, Estee Lauder introduces a new cosmetic in your store, Donna Karan gives you a one-year exclusive on a new line.” That’s not to mention economies of scale--advertising expenditure spread over more sales dollars. Leading stores often can pay higher commissions to salespeople, motivating them to cater more to customers, which brings the customers back again.

In retailing, financial formulas don’t define leadership--something like stage presence does. “When you go to a town, you know immediately which is The Store,” says analyst Marcia Raley of Minneapolis’ Dain Bosworth brokerage.

So who’s dominant? According to figures compiled by Sanford C. Bernstein analyst David Poneman, The Broadway leads in Los Angeles and San Diego, Macy’s leads in the New York area and also in San Francisco and Philadelphia. Marshall Field leads in Chicago, Foley’s in Houston and Dallas, Nordstrom in Seattle, Dillard’s in Phoenix.

But next year some leading positions could change. “Those with debt, even Macy’s, will lose flexibility,” says Danoff. Dillard Department Stores, which has a strong balance sheet, could make gains in Texas and Ohio.

Meanwhile, an ill wind will benefit whoever acquires Chicago’s Marshall Field, which is up for sale because its British owner, BAT Industries, is restructuring to escape a takeover by raider James Goldsmith.

Marshall Field, which analysts say may be bought by its own managers, is the kind of property that financial markets dote on today: a store so well liked that it becomes synonymous with its community. Dayton’s of Minneapolis is like that--customers went to bat for it two years ago when the Minnesota legislature sought voter sentiment. Nordstrom, which is renowned for customer service, has attracted a huge investor following in recent years.

So why, then, are some of the biggest retailers in trouble? Simple: In all the calculations about cash flow and debt service, those companies never mentioned customers. That customers would come to the stores was taken for granted. There’s a powerful warning for every business in the name Campeau.