Ailing National Lumber Tries to Reconstruct : Retailing: The firm has scaled back drastically after filing for Chapter 11 bankruptcy protection. But experts say the competition may prove to be too much.

Almost four months after filing for bankruptcy protection, National Lumber & Supply is humbled but undeterred, says a top company executive.

“One thing bankruptcy does is make you humble and provide you with the discipline to run the business at low costs,” said Executive Vice President and Chief Operating Officer Martin C. Schaeffer, a home-improvement industry veteran who joined the firm in June. “But we believe we have a place in the market.”

Some retail experts disagree. They say National Lumber’s financial problems are so severe and its competition so fierce that it will take a herculean effort to save the company.

National Lumber, which filed for protection from its creditors under Chapter 11 of the federal bankruptcy code in April, disclosed cuts last week that it hopes will shave $20 million in expenses this year. It has shut nine of 21 stores, cut more than a third of its 1,200 employees through layoffs and attrition, reduced corporate staff and executive salaries, and closed a central warehouse.

But the lessons in cost-cutting may be coming too late, and they do little to change the competitive pressures in the home-improvement industry that led National Lumber to lose $20.5 million in the past two quarters. Schaeffer said the company will attempt to reorganize and emerge from bankruptcy, but he is making no projections on when the firm will return to profitability.

In a recent federal financial filing, the company also disclosed for the first time that it could cease operations and liquidate if it cannot stop its losses. Schaeffer says the statement is only precautionary and that the company has no plans to shut down.

“National Lumber got caught in a stranglehold,” said Tom Neven, an associate editor with National Home Center News, a trade journal in New York. “The warehouse chains are their chief problem. The slowdown of the market in Southern California is another.”

The strain on the company’s finances led National Lumber to take out a line of credit of up to $13 million with Fidelcor Business Credit Corp. in September, 1989.

Since the Chapter 11 filing, Fidelcor has agreed to lend about $3 million to the company, and it will continue to extend a line of credit based on National Lumber’s inventory. In return, Fidelcor has preferred rights to National Lumber’s non-lease assets.

For working capital, National Lumber borrowed $9.1 million on the high-interest credit line by the time of the bankruptcy filing. In a last-minute bid, Mel Jaffee, chairman and chief executive, loaned the company $2.5 million.

Even so, for its fiscal year ended Jan. 31, 1990, National Lumber lost $18.5 million on revenue of $140.5 million, compared to a loss of $4.6 million on revenue of $152.4 million a year earlier. And for the quarter ended April 30, the company lost $6.5 million on revenue of $21.7 million, compared to a loss of $1.3 million on revenue of $34.4 million in the year-earlier period.

The company estimates that it can be profitable if gross sales exceed $1.6 million per week. From mid-May to June, National Lumber’s sales ranged from $1.4 million to $1.8 million per week. Losses in May ranged from $300,000 to $500,000 per week, and the company hopes to reduce losses to $55,000 to $60,000 per week in July.

Closing the central warehouse saved another $2.5 million, but the warehouse was a key part of a distribution system that allowed the company to replace fast-moving inventory quickly, a key service for customers. Schaeffer says service has not suffered.

The 12 remaining stores are profitable, Schaeffer said, but they will now have to share a larger burden of corporate overhead. That overhead has been reduced by the elimination of the company’s personnel department, and reductions in the purchasing, security and safety staffs.

Schaeffer said the company is revamping the merchandising and displays in each of its stores, using the Garden Grove store as an experimental location. Among the planned changes is a renewed focus on products for kitchen remodeling projects.

Most vendors are granting credit terms, and the company has launched a print and radio advertising campaign that touts the “new National Lumber.” The firm has dropped the use of its cartoon characters, Shorty and Cheap Chicken, because of the “perceived ineffectiveness” in advertising, according to SEC filings.

So far, the changes have the full support of the creditor’s committee, said Victor Garofalo, vice president of sales and marketing at Timberline Sales Inc. in Orange, one of National Lumber’s trade creditors.

But one retail expert, who asked not to be identified, said National Lumber’s best option is to sell its store leases and inventory to a larger chain. The company expects to sell its Fullerton lease for $948,000 and is negotiating to sell other leases for popular locations, which could be worth more than $1 million each.

“Their future as National Lumber is as bleak as it could be,” the analyst said.

NATIONAL LUMBER’S ROAD TO RECOVERY

Here are the steps National Lumber & Supply has taken since April to improve its financial picture:

Closed nine of 21 stores in Southern California

Reduced its work force to 750 people from 1,200 through layoffs and attrition

Closed a central warehouse

Reduced its corporate headquarters staff by 20%

Reduced executive salaries

Launched a radio and print advertising campaign touting the “new National Lumber” and eliminated the use of its Shorty and Cheap Chicken cartoon characters.

Established a $13-million line of credit with a secured lender to replenish inventories at its retail stores

Negotiated credit terms with 65% of vendors

Converted store in Carson to a bargain clearinghouse

Revamped its Garden Grove store in an experimental project to focus on selling products for do-it-yourself projects such as kitchen remodeling.

Arranged for sale of the lease at its closed Fullerton store while negotiating the sale of other store leases

Source: National Lumber & Supply