Carter Hawley Stores File for Bankruptcy : Retailing: West’s biggest department chain is crippled by debt. Officials plan comeback but obstacles are many.

Carter Hawley Hale Stores, crippled by the junk bond debt it took on four years ago to fend off corporate raiders, on Monday sought Chapter 11 bankruptcy protection from its creditors. It is one of the largest corporate bankruptcies ever in California.

The Los Angeles-based company, parent of the Broadway-Southern California and the biggest department store organization in the West, now begins the complicated job of trying to get back on its feet financially.

Carter Hawley’s fall, widely expected in recent days as word got out about its cash squeeze, marks another in the rash of retailing bankruptcies since early last year linked to junk bond-financed buy outs and corporate overhauls. Analysts said Carter Hawley also fell victim to the slump in U.S. retail sales over the past two years and to more aggressive competitors that have taken away some of its customers.

Company executives said business is continuing as usual at the 88 stores. There are no plans, they said, for store closings or additional layoffs.

Under Chapter 11, a company is shielded from creditors’ lawsuits while it keeps operating and tries to work out its financial problems. Even if Carter Hawley reorganizes successfully, it is likely to remain under bankruptcy court supervision for at least 18 months and to emerge, some retailing analysts said, as a smaller company.

In addition to Broadway-Southern California--the Southland’s biggest chain of department stores--Carter Hawley owns the Bay Area’s Emporium chain, Weinstocks in the Sacramento area and Phoenix-based Broadway-Southwest.

Philip M. Hawley, chairman and chief executive, said the Chapter 11 filing was directly triggered by an abrupt tightening last month in the credit terms demanded by Carter Hawley’s suppliers. He said that suppliers acted because of fears raised by the weak Christmas shopping season and the recent bankruptcies of other debt-heavy retailers.

Suppliers that previously gave Carter Hawley stores 30 days to pay bills, Hawley said, “now were giving us 20. People who had been giving us 60 days now were giving us 45 days.”

As a result of tightened credit, Hawley said, stores were running low on goods.

He said the company decided on Chapter 11 bankruptcy as a way to secure enough financing to ease suppliers’ concerns and get merchandise flowing again to the stores. Taking advantage of the protection granted to lenders and borrowers under Chapter 11, Carter Hawley secured a commitment from New York-based Chemical Bank for $800 million.

Of that total, $550 million will finance its credit card business and $250 million is for working capital and other general business purposes.

Among those most worried about Carter Hawley’s bankruptcy court filing will be many of its 29,000 employees, particularly the roughly 14,000 who have participated in the company’s 401(k) savings plan. The plan, designed both to augment employees’ pension benefits and strengthen the company’s takeover defenses, holds 45% of Carter Hawley’s stock. The pension plan is not affected by the filing.

Often, however, common stock holds little or no value after a Chapter 11 filing. In trading on the New York Stock Exchange Monday, Carter Hawley shares fell 25 cents to close at $1.625, near its all-time low of $1.375 and down from $14 in the summer of 1989.

In addition, employees have no other investment holdings through the savings plan--unlike most 401(k) programs, Carter Hawley’s program allowed employees to buy company stock only.

“It’s sort of scary,” said Bill Fiore, president of Local 1100 of the Department Store Employees Union in San Francisco, which represents about 870 Emporium employees.

“I don’t feel our money is worth as much as it was when we put it in there, and I think most employees feel the same way.”

Despite management’s promise to avoid layoffs, Fiore said, many employees remain worried about their jobs.

Hawley countered that a Chapter 11 reorganization was the best way to overhaul the company and restore the value of its stock over the long run. He also said that the company is in better shape than most companies in Chapter 11.

Among the others affected by the Chapter 11 filing are Carter Hawley’s more than 15,000 suppliers--including clothing firms, furniture manufacturers and others--who might collect a fraction of what they are owed. In addition, they will have to wait until the reorganization is completed before getting paid. The same is true for holders of Carter Hawley’s $350 million in junk bonds, which were issued to finance the company’s 1987 overhaul.

After the bondholders, the biggest unsecured creditor listed in the bankruptcy filing is the Neiman Marcus Group, which Carter Hawley spun off in the reorganization four years ago. It is owed $14.3 million. It was followed by Wohl Shoes, which is owed $12.2 million.

The bankruptcy filing is a personal blow to Hawley, the chief proponent of the 1987 reorganization. Hawley, 65, one of the company’s namesakes and its chief executive since 1977, said he plans to remain as chief executive until 1994 and bring the company out of bankruptcy.

Hawley is the biggest individual stockholder in the company, with more than 4% of its shares, and he is one of the retailing industry’s highest-paid executives,with cash compensation of $1 million last year.

Carter Hawley has done poorly and carried a heavy debt burden for years. According to figures from the Value Line Investment Survey, the company’s profits have lagged the retailing industry average every year since 1975.

Many of its stores are showing signs of age, some with torn carpeting and paint peeling from the walls. Analysts fault the company for maintaining a vaguely middle-of-the-road, conventional department store image at a time when the industry’s leaders have thrived by offering low prices, providing extra service or specializing in particular types of merchandise.

Like many other retailers, Carter Hawley has suffered from the nationwide overbuilding of shopping centers during the 1980s. Competition is so intense that some experts predict that more than half of today’s stores will be out of business by the end of the decade.

The turning point for Carter Hawley came in 1987, when it reorganized to repulse a $1.93-billion takeover offer from The Limited retail chain and real estate developer Edward J. DeBartolo Corp. At the time, Carter Hawley spun off its specialty chains--the Neiman Marcus, Bergdorf Goodman and Contempo Casuals stores. The divested stores, now known as the Neiman Marcus Group, had accounted for nearly one-third of Carter Hawley’s sales and half of its profits.

Also as part of the reorganization, Carter Hawley paid outside shareholders one share of stock in the Neiman Marcus Group and $17 a share for each share of Carter Hawley that they owned.

The overhaul was financed with high-interest junk bonds, but the company assured investors that its core department store business would recover, providing plenty of earnings to pay off the debt. The recovery, however, never came.

In a 566-page prospectus, Carter Hawley told shareholders that profits would reach $85 million by its 1990 fiscal year. Instead, the company lost $26 million last year, after earning a less-than-projected total of $31 million during the two previous years.

Until recent weeks, however, most industry observers thought Carter Hawley had the financial resources to stay out of bankruptcy court for at least a year or more.

To shore up its finances, Carter Hawley announced a series of major actions over the past four months. The company sold its Richmond, Va.-based Thalhimers division in December to May Department Stores for $317 million, a move that reduced Carter Hawley’s overall debt to $1.3 billion.

The company also cut about 1,000 jobs. In addition, Carter Hawley made a number of high-level executive changes, including the promotion of H. Michael Hecht to president of Carter Hawley, the No. 2 executive position behind Hawley. Hecht had been chairman of Broadway-Southern California.

Carter Hawley appeared to edge toward bankruptcy in recent weeks, however, with the company’s announcement of the termination of major financial agreements with General Electric Capital Corp. and Bank of America.

Carter Hawley also cut off payments to suppliers, angering manufacturers who already complained that the company had long been slow in paying its bills.

Although most experts expect suppliers to resume shipments to Carter Hawley, some manufacturers may be reluctant. “This is a company that traditionally hasn’t paid its bills well. What is there to assure people that the company won’t do that again in bankruptcy?” said Robert F. Carbonell, director of credit for Dun & Bradstreet’s Credit Clearing House division, a consultant to the apparel industry.

Analysts also expressed concerns that Carter Hawley has fallen too far behind its competition to successfully come back.

The company’s stores “have no identity,” said Kurt Barnard, publisher of the newsletter Retail Marketing Report. “It has continued to try to be everything to everybody. You can’t do that any longer.”

The Chapter 11 filing was made in U.S. bankruptcy court in Los Angeles before Judge James R. Dooley. The judge set a hearing for Wednesday to consider interim approval of Carter Hawley’s $800-million commitment from Chemical Bank, and he gave the retailer immediate approval to continue with its daily business activities.

In the filing, Carter Hawley listed assets of $1.2 billion and liabilities of $1.38 billion.

BIGGEST RETAILING BANKRUPTCIES

Figures include bankruptcy court filings since 1980 by the largest publicly held retailers.

Company Date Total assets Federated Dept. Stores Jan., 1990 $7.9 billion Allied Stores Jan., 1990 $3.5 billion Southland Corp. Oct., 1990 $3.4 billion Ames Dept. Stores April, 1990 $2.1 billion Circle K Corp. May, 1990 $2.0 billion Revco D.S. July, 1988 $1.8 billion Best Products Jan., 1991 $1.4 billion Hills Dept. Stores Feb., 1991 $1.3 billion Carter Hawley Hale Stores Feb., 1991 $1.2 billion

Source: Bankruptcy DataSource of Boston, Mass.