Carter Hawley Failed in Many Departments
When you’re born with a silver spoon, you’re not supposed to fail. Yet Carter Hawley Hale, the largest department store chain in California and the West--one of the most attractive retail markets in the world--is in Chapter 11. Why?
Complacency and imprudence. Carter Hawley management, led by Chairman Philip M. Hawley, failed to cope with fundamental shifts in retailing in the 1980s. And management compounded the company’s troubles by its response to takeover bids in 1984 and ’87.
Carter Hawley was not alone in having troubles in the ‘80s. Many properties of the nation’s largest chains--Federated Department Stores and Allied Stores--now reside in Chapter 11, a form of bankruptcy in which a business can continue to operate without fear of creditors seizing its assets. Other retailers, such as Macy’s, are burdened by debt after a leveraged buyout.
Carter Hawley did not sell out. It fought off two takeover bids by the Limited, a specialty store chain led by Leslie H. Wexner and other investors. But the cost of independence was high. Ultimately, Carter Hawley had to surrender control of its most successful store divisions--Neiman Marcus, Contempo Casuals and Bergdorf Goodman--to one investor and take on imprudent amounts of debt to pay off others.
In addition, Carter Hawley management exposed employees to frankly speculative risk when it put 45% ownership of the restructured company--owner of Broadway, Emporium and Weinstock’s department stores--in an employee stock ownership plan. The maneuver shielded Carter Hawley from further takeover attempts but lured employee savings into a debt-ridden department store company that would have difficulty meeting interest payments in the best of times.
These are not the best of times. The immediate cause of bankruptcy is that Carter Hawley cannot meet payments on the debt given “curtailed consumer spending, accompanied by a contraction in the availability of credit,” as Philip Hawley said in a statement Monday.
From the start the debt hobbled any chance the company had to remodel its stores to attract customers and profits. The company lost $26 million last year on $2.86 billion in sales.
But Carter Hawley has been lagging for a long time. Throughout the 1980s, its profitability has been less than that of other department and specialty store chains. Carter Hawley turns over its inventory fewer times than almost all other retailers--a key measure of how well stores move merchandise--and it has lower return on investment. In business, when you don’t make a profit comparable to other companies in your field, nobody thinks it’s because you’re serving the public better. If you were, the public would be flocking to your stores. The judgment rather is that your management is wanting.
The big retailing shift of the 1980s was that department stores became anachronisms in the age of malls. The mall itself became a giant store with a variety of specialty departments within it. Customers bought different goods from different stores; televisions, toys, furniture, athletic wear and, most important, fashions for young people all sold through specialty stores. Department stores were left trying to sell all sorts of merchandise but attracting fewer customers.
Nothing wrong with such a trend. Managements are paid to cope with change. Philip Hawley was paid more than $500,000 a year for most of the ‘80s and lately has been paid about $1 million.
But Hawley’s company was slow to adapt. And with a low stock price reflecting lagging profitability, it became the target of the first retail takeover attempt of a merger-happy decade. In 1984, the Limited’s Leslie Wexner saw valuable merchandise selling at a bargain--particularly the Neiman Marcus division--and offered more than $1 billion in cash and Limited stock for Carter Hawley.
Hawley fought off the bid, enlisting an ally by putting a block of convertible preferred stock in the hands of General Cinema Chairman Richard A. Smith, who is renowned as a shrewd investor.
After that, there was an interval in which Carter Hawley tried to shape up--selling some assets, such as the Philadelphia-based Wanamaker chain. But by 1986, Wexner came back with a bid 50% above Carter Hawley’s stock price. And General Cinema’s Smith pressed Hawley to sell him Neiman Marcus and the other specialty stores that accounted for half of Carter Hawley’s profit.
So Hawley spun off Neiman Marcus, giving Smith control in exchange for his preferred stock. And he borrowed a lot of money--increasing long-term debt by $600 million--to pay a special $17 dividend to shareholders.
Then Hawley, who is now 65, set up the reorganized Carter Hawley--a smaller company, stripped of its capital and its most profitable assets, but with more than $1 billion of debt. That would be the company, said Hawley, where many employees would have increased motivation because they’d be owners.
Those owners now face loss of their savings, as well as their jobs, depending on how Carter Hawley creditors decide to dispose of the company assets. It is not an opportune time to sell assets. Carter Hawley stock closed Monday at $1.625 a share, but all value could be wiped out in the bankruptcy proceedings.
Hawley and company managers face possible loss of jobs and money as well. Hawley himself collected the special dividend in 1987, but converted it all into stock in the new Carter Hawley Hale and now has lost almost $12 million based on his ownership of 1.24 million shares.
Yet he talks as if bankruptcy were a kind of corporate strategy. “Carter Hawley Hale has many strengths upon which to build a solid plan of reorganization,” he said in his statement. “It is important to recognize that Chapter 11 does provide the possibility of an economic return to shareholders in the future.”
But, of course, smart shareholders pulled their money out of this company in 1987.
