Service Merchandise reels under cash woes - Company Profile

Discount Store News, Jan 4, 1999 by Richard Halverson

BRENTWOOD, TENN. -- The recent disclosure that Service Merchandise missed a $13.5 million interest payment on a $300 million bond issue and will have to cast about for options to finance its operations this year sounded another harsh note at the end of a troubled year.

SME has until Jan 15 to make the $13.5 million interest payment. Its bank creditors agreed to waive any cross default until then.

The financial community reacted sharply and swiftly to the news.

* On the day after the Dec 15 announcement, the stock price of SME fell 50% to 50 cents. Its price as of Dec 3 was 1 11/16. On Dec 16, SME closed at 37.5 cents, down 12.5 cents.

* Also on Dec 16, the price of SME's junk bonds fell 14 points to close at $22. "The debt is in default now," said Mary Lou Burde, corporate ratings analyst at Standard & Poor's. However, SME obtained a 30-day grace period to pay the skipped interest payment and avoid technical default.

* Standard & Poor's immediately cut its rating on the $300 million issue to single-D and reduced SME's corporate credit rating to a "not meaningful" level.

* In the "high likelihood" of a default after the beginning of the year, Moody's Investors Service cut the rating on three other SME debt issues. The only good news is that its outlook on SME's bank credit line remains stable because the banks are likely to get their money m the event of default.

* Duff & Phelps Credit, a tertiary rating company, also cut its rating on four SME debt issues to junk bond status.

Service was scheduled to release its third weekly statement about Christmas sales on Dec. 30, 1998 Until then, the company declined to comment on the erosion of its financial prospects.

In a second report on Dec. 15, Service also said that through Dec. 13 fourth-quarter comp store sales were down in the mid-teens. Even though jewelry comps rose 9%, hard lines comps were down in the low 20s.

It is clear that all the varied merchandising strategies Services has tried over the past several years, including giving up completely the catalog showroom format late last August, have yet to produce results.

The company said liquidity would fund its operations through Dec. 31, and that it is exploring alternatives to fund its operations for 1999. Service gave no indication as to what those alternatives might be.

It has not been determined whether Service is making payments on its bank credit.

As of Nov. 29, SME had borrowed $298 million under its bank line of credit and still had $270 million to draw on.

Cash flow remains a continuing problem for SME.

"The company has been steadily losing its EBITDA over the course of the years," said S&P's Burde, "as several changes in their marketing strategies refused to work."

Service is the sole survivor of the once-thriving catalog showroom industry. Analysts now are asking whether it may be going the way of Best Products, which folded in '96 after declaring Chapter 11 for the second time.