The financial unraveling of Payless Cashways - Brief Article - Statistical Data Included

Home Channel News, Oct 8, 2001

A long, slow slide

LEE'S SUMMIT, Mo. -- When Payless Cashways reported that same-store sales to professional customers through the first six months of its fiscal year had plummeted 30 percent, those numbers all but foretold the fate of the company, once the industry's fifth-largest retailer.

On Aug. 28, the company alerted a bankruptcy court that it no longer had the funds to continue its operations.

Payless, which began as a single lumberyard in Pocahontas, Iowa, in 1930 and grew into a 200-unit, $2.6 billion enterprise in the early 1990s, spent most of the last decade trying to shift its stores and yards toward pro customers. At the same time, after filing for protection under Chapter 11 in 1997 and again on June 4 of this year, the company continued to close stores that management had deemed unprofitable or unconvertible to the pro-focused format that it had developed.

Its boldest move in that direction was the opening in fall 2000 of five yards called PCI Builders Resource that targeted home builders as their primary customers. And by the end of 2001, the company expected to have a total of 77 stores converted to what Payless referred internally as its "gold" format, whose products and services would focus on three distinct customers: remodeling tradespeople, properly management buyers and project-oriented homeowners.

In retrospect, this strategy may have done more to blur than clarify Payless' image and customer focus. To the untrained eye, Payless' pro-focused merchandise mix didn't appear to be all that much different from the assortment that it carried when its stores were more oriented toward consumers. And its format--a 28,000- to 35,000-square-foot hardware store attached to a three-to seven-acre drive-through lumberyard--also sent mixed messages to homeowners and even professionals who were shifting their spending to big-box retailers like Home Depot or Lowe's, or to purer lumberyards that made no attempt to pursue DIYers.

It's worth noting that as Payless was struggling to bring builders and remodelers into its stores, particularly within the last five years, a number of its pro-oriented competitors -- dealers such as Carolina Holdings, Builders FirstSource, BMC West, Foxworth-Galbraith, Hope Lumber & Supply and Lanoga -- were expanding through acquisition.

Payless' chronic lack of profitability severely hampered its maneuverability in this increasingly competitive market. From 1991 through 2000, the company reported nearly $538 million in losses, to which $58.1 million in additional losses were added in the first six months of this year. Revenues for the first half of 2001 declined nearly 39 percent to $471.3 million.

The financial precariousness of the company, compounded by its Chapter 11 filing in June, caused its suppliers to lose confidence and stop shipping products to its stores. By early August, Payless' outlets and yards were seriously short of merchandise, despite a $160 million line of credit which it had negotiated with Congress Financial Corp. Careful readers of that agreement saw that it was tied to inventory levels in Payless' stores, and would be reduced to $140 million after 90 days and to $130 million after 120 days.

This lack of vendor support was the final nail in Payless' coffin, and forced company officials to close Payless' last 73 stores and lay off 5,000 employees.

By mid-September, the bankruptcy court in Kansas City, Mo., had appointed a trustee and three liquidation agents to handle the disposal of Payless' assets. On Sept. 13, the court agreed to allow that trustee -- Craig Graff, a principal in Skokie, III.-based turnaround firm Silverman Consulting -- to use a temporary budget for the company's dismantling until a longer-range plan of liquidation was hammered out.

After Payless filed Chapter 11, it closed 37 stores. Soon after it began to liquidate its merchandise through going-out-of-business sales. On Sept. 10, the bankruptcy court appointed three companies -- Hilco Merchants Resources, Ozer Group and The Nassi Group -- to handle the liquidation of Payless' assets. A Hilco spokesperson told Pro Dealer that merchandise and fixture selloffs should be completed by mid-November. According to court documents, inventory in Payless' stores was valued at $115 million. Vendors with the greatest exposure include Georgia-Pacific, Masco, Black & Decker, Louisiana-Pacific and PrimeSource.

On Oct. 25, a hearing is scheduled to approve the sale of six stores. Company spokeswoman Maria Holberg said that Payless had sold 16 stores between June 24 and Aug. 28, and she confirmed a report in the Kansas City Star that the real estate fetched more than 100 percent of its appraised value. Payless estimated that the 110 stores that it has on the market are worth $230 million.

Payless owes its secured creditors $270 million. It is also on the hook contractually for $1.5 million in severance to five top officials, including $975,000 to its president and CEO Millard Barron, to be paid over an 18-month period. How much Barron or any other Payless exec gets, though, would be subject to resolution in bankruptcy court.