Carter Hawley Still Struggles : Retailing: A loss is likely this year for the debt-strapped owner of the Broadway-Southern California stores. The company continues to express optimism about a turnaround.

For Carter Hawley Hale Stores, these were supposed to be good times.

Three years ago, in spurning a hostile takeover, the Los Angeles retailer spoke of a coming turnaround in the department store business, including its own Broadway-Southern California stores and four other chains.

Profit, it said, would climb steadily. In a 566-page document prepared as part of a reorganization plan, Carter Hawley told shareholders that profit would reach $85 million in fiscal 1990, which ended Saturday. Instead, there’s likely to be a loss of at least $2 million. Saddled with debt, the company made only $17.7 million in 1988 and $13.5 million in 1989.

“It’s almost like a bad joke,” said Edward A. Weller, a highly regarded analyst with Montgomery Securities in San Francisco.

Carter Hawley’s many critics say the company, after years of comforting itself with an upbeat assessment of its own prospects, now faces serious problems. They contend that the company--one of the nation’s biggest department store empires with 114 outlets--continues to suffer from aging stores that are badly run down and merchandising programs that fall flat. In contrast to prosperous, trend-setting retailers such as customer service-minded Nordstrom and discount-minded Wal-Mart Stores, Carter Hawley offers “nothing that really distinguishes it from the crowd,” said Carl Steidtmann, chief economist for the retail consulting firm Management Horizons in Columbus, Ohio.

Many analysts maintain that Carter Hawley is so weighed down by debt that it eventually will be forced to sell out to another firm or, at the very least, divest one or more of its divisions.

But the company remains optimistic. “We have been successful in setting the right direction,” said Philip M. Hawley, the company’s chief executive since 1977 and its chairman since 1983. “I think we have put some very important strategic objectives in place. We’ve defined the mission of the company clearly.”

He said there is “no question” that profit will recover over the next few years, even if the economy stumbles.

Hawley predicts that customer traffic in the stores will grow briskly as the company’s store remodeling program gains momentum. “We get a very major profit, and sales pop, when we modernize stores,” he said.

Further, he says, the shifting of sales clerks to a commission-based pay system in the late 1980s will yield further gains. At the same time, Hawley says, expenses will be curbed by a continuing consolidation of back-office and administrative operations.

Hawley says the company also will benefit from new top management installed over the past two years at every Carter Hawley division other than its flagship Broadway-Southern California chain. The management changes came at Phoenix-based Broadway-Southwest, Emporium in the Bay Area, Sacramento’s Weinstocks chain and Richmond-based Thalhimers.

“It’s a 180-degree change from what had been going on,” Hawley said.

Hawley points to the Broadway store in Montclair as an example of what he expects to happen throughout the company. Two of the store’s floors were renovated in 1986, and it also is one of the locations where Carter Hawley is making an extra effort to improve customer service through its “model store” program. The result: Sales have risen 51.6% over the past four years, versus 12.5% for the company overall.

Carter Hawley followers also are looking for a spurt in revenue when the company reopens its earthquake-ravaged Emporium store in Oakland on Friday, opens a new Broadway location in Santa Barbara on Aug. 17 and replaces an old Thalhimers in Winston-Salem, N.C., in October. Analysts are hopeful that the rampant price-cutting competition among department stores the past year will ease, boosting profit margins.

But many others who follow the company say recent developments are not enough to perk up Carter Hawley, given its history of weak profits. Hawley “is still the same optimist he was 25 years ago. He’s not a realist,” said Robert F. McCullough, chairman of McCullough, Andrews & Cappiello. The San Francisco investment firm is Carter Hawley’s No. 2 shareholder, with nearly 8% of its stock.

According to figures from the Value Line Investment Survey, Carter Hawley’s profitability has lagged the retailing industry average every year since 1975. The charges from the 1987 restructuring wiped out the company’s slim net profits the past five years.

The company still faces big obstacles. Burdened with heavy junk bond debts since reorganizing, it needs plenty of income just to make its interest payments, let alone pay for remodelings. Yet the retailing industry is in the midst of a competitive blood bath that has prompted one debt-heavy store after another to seek refuge in bankruptcy court.

Meanwhile, the economy isn’t cooperating. Analysts are worrying about the prospect of a national recession. Closer to home, Southern California is being hit by massive aerospace layoffs.

No one is predicting that Carter Hawley will join the roster of retailers in bankruptcy. Many analysts believe that operating earnings generally are improving or at least stabilizing, and they say the company is bolstered by extensive real estate holdings that can be sold or mortgaged for cash.

Also, no big principal payments are due on Carter Hawley’s $350 million in junk bond debt until 1996. That gives management time to maneuver if--as expected--suppliers and their lenders stay calm and stick with the company.

Still, debt clouds the company’s future. McCullough says he has invested in Carter Hawley on the expectation that the company eventually will be bought, broken up or run by new management.

For many of Carter Hawley’s 37,000 employees, the company’s uncertain future is particularly troubling, even beyond the issue of whether their jobs could be jeopardized someday. Employees own 46% of Carter Hawley’s stock through a company 401(k) savings plan, a fund through which workers buy company stock, typically to supplement their company pension. Yet the stock closed at $5.25 Friday, near its all-time low and down from $14 a year ago.

For outside investors who have held Carter Hawley stock since 1986, there is the frustration of knowing that their holdings probably would be worth 70% more today if the company had accepted a $1.93-billion takeover offer from the Limited and Edward J. DeBartolo Corp. four years ago.

Shareholder activists have charged that Carter Hawley executives ignored the interests of investors and acted primarily to save their own jobs when they rejected the Limited-DeBartolo bid. “It was an outrageous example of management efforts to entrench itself,” said James E. Heard, managing director of the Analysis Group.

On the other hand, there is no assurance that the raiders would have fared better with Carter Hawley. DeBartolo, for his part, also happened to be a partner with developer Robert Campeau in a disastrous foray into the department store business.

To fend off raiders, Carter Hawley reorganized in 1987 by recapitalizing and spinning off its specialty chains--the Neiman Marcus, Bergdorf Goodman and Contempo Casuals stores. They had accounted for nearly one-third of Carter Hawley’s sales and half its profit.

Hawley, one of the company’s namesakes (the company changed its name from Broadway-Hale Stores to Carter Hawley Hale in 1974), dismisses the shareholder activists’ charges. He notes that shareholders overwhelmingly approved the restructuring that headed off the takeover attempt.

Further, Hawley says, shareholders had plenty of time between the announcement of the overhaul in December, 1986, and its execution in September, 1987, to sell their stock at $60 or more in the open market. Company officials say that indicates that the restructuring plan was at least as good as the Limited-DeBartolo offer, and they believe Carter Hawley is better off being owned largely by its employees.

Some analysts today ridicule the financial projections made for the reorganization in 1987. But the company’s supporters say the Bay Area earthquake and the difficulties in the department store business are partly to blame. “That was outside of management’s control,” said Robert W. Gordon, a vice president with Bank of America, the company’s principal lender.

Hawley concedes that he was over-optimistic. He says that one of the main problems was that he didn’t anticipate how long it would take to arrange financing for what he views as the crucial store remodeling effort.

But Hawley proudly defends his approach to financing the company. By taking its time, he says, the company has been able to raise funds at relatively attractive interest rates.

Lately, it has raised more and more of its cash by mortgaging its real estate. Just last week, the company raised $30 million in a mortgage deal, and Hawley says real estate remains a solid source of financing despite the general softness in California property values.

He also notes that other debt-heavy retailers that relied more on junk bond financing have gotten into serious trouble, particularly the Campeau Corp. department store divisions, which filed for bankruptcy court protection in January.

“We don’t have room to indulge in paying that kind of price for money,” said Hawley. “Has that made operating the last three years more difficult? You bet it has.”

Operating the business may be even tougher than executives acknowledge. Analyst Barre W. Littel of First Boston, who just published a report on Carter Hawley, maintains that the financial measure that the company cites as the most accurate indicator of its performance doesn’t tell the full story. The financial yardstick in question is earnings before interest and taxes, known in the financial community as EBIT.

Investors and analysts typically are more interested in a company’s actual profit. But Carter Hawley and other companies argue that EBIT reflects how well they would do if they were not burdened with heavy debts and thus signals what can be expected of them once their debts are retired.

In Carter Hawley’s case, EBIT climbed from $66.9 million in 1984 to $172.8 million in 1989 and is up slightly for the first nine months of this fiscal year, despite the Bay Area quake. Littel points out that part of the EBIT increase over the past two years has come from expansion of the company’s credit card business. The trouble, Littel says, is that EBIT reflects the extra credit card revenue, but not the extra costs.

If you add in the costs, Littel says, Carter Hawley’s performance appears to have been flat last year and down this year. Carter Hawley rejects Littel’s conclusions, saying that he miscalculated the costs of its credit card program.

All the same, Hawley acknowledges that Carter Hawley’s EBIT remains well below par for the industry. Moreover, Carter Hawley also lags in other measures of performance watched by analysts.

For instance, the sales per square foot at its Broadway-Southern California stores--the region’s biggest department store chain, with 43 outlets--are lower than those at Nordstrom, Bullock’s and Robinson’s and barely exceed those at May Co. California.

Said Kurt Barnard, publisher of the newsletter Retail Marketing Report: “Carter Hawley has some very real problems on its hands, problems in terms of marketing, merchandising and customer appeal. Above all, I think Carter Hawley is in a quandary as to who its target customer is, and how to reach that customer.”

HOW CARTER HAWLEY’S OUTSIDE INVESTORS FARED

Most outside investors would be better off today if Carter Hawley Hale Stores had accepted the takeover offers made for the company in 1984 and 1986. The following shows how outside shareholders would have fared with either takeover offer versus how they actually fared.

Outside shareholders are considered to be investors other than employees and General Cinema Corp., which was Carter Hawley’s largest shareholder before Carter Hawley restructured in 1987. Under the restructuring, investors received one share of the Neiman Marcus Group and $17 in cash for each share of Carter Hawley they owned. They also kept their Carter Hawley stock.

What investors would have today if Carter Hawley accepted the $35-a-share offer in 1984: $62.00 per share.

What investors would have today if Carter Hawley accepted the $60-a-share offer in 1986: $83.85 per share.

What investors who bought Carter Hawley stock in 1984 actually have today--$47.94 per share.

All figures assume that proceeds and dividends under each scenario were reinvested at a 10% annual rate of return, a return that is lower than the performance of the overall stock market during the period.

Source: United Shareholders Assn.

401(k) BENEFITS DISPUTED: Not everyone thinks employees are getting a good deal from Carter Hawley’s savings program. D7