Wall Street gives chains mixed score card; ratings reflect fluctuating regional economies - discount chain securities - Regionals

Discount Store News, August 15, 1994 by Neil Nordby

Regional discount store chains have received mixed report cards from Wall Street in the 1990s.

Shareholders were either enjoying an 86% gain since Ames emerged from Chapter 11 or agonizing over a 95% plunge in the value of Roses shares after it declared Chapter 11.

Regional economies, of course, have had as much to do with the mixed bag of results as has the state of the nation's economic health as a whole.

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The Northeast has been in a funk for most of the '90s, and only now is in the process of pulling itself up by its frayed bootstraps. The national economy, for that matter, hasn't been exactly kind to retailers.

But for the first time since 1984, next year will see all 50 states expand at the same time, predicts Regional Financial Associates of West Chester, Pa. The dark could in that otherwise bright forecast, however, is that the Northeast will still lag noticeably behind the Mountain and South Atlantic regions.

So it will continue to be a tough retail environment for Northeast chains. Some growth, however, is better than none, and the Northeast and the chains operating there will take any growth they can get.

While growth means good news for these chains, it also bodes well for Wal-Mart, which keeps all regional chains looking over their shoulders and the major factor behind the problems of Roses and Jamesway.

With so many regionals based in the Northeast, it is easy to see why the '90s have been so rough for them. Jamesway, for example, filed for Chapter 11 protection in July 1993 and at press time was still negotiating with its creditors about its plan of reorganization.

Ames was in dire financial straits until it finally emerged from Chapter 11 in December 1992.

Hills also underwent successful corporate surgery last year, when it emerged from Chapter 11 with a healthy balance sheet. (For his role in restoring Hills, Michael Bozic was voted Discount Store News' Discounter of the Year for 1993.)

Stuarts also traveled the Chapter 11 route, emerging from bankruptcy protection in October 1992.

One common factor among all the worst performers on the accompanying stock chart: all filed for Chapter 11 in the '90s.

In comparison to the stock price hurt put on those four by the economic ills of the Northeast and Wal-Mart's muscle, two Northeastern chains have held their own. Caldor has seen its stock price grow 56% in the '90s to $28 from $18. And Bradlees, though bedeviled of late by flat same store sales, saw its stock price gain almost 3% to close June 30 at $14.25.

For regional chains based elsewhere, the results also are mixed. News has been good for Fred Meyer, Portland, Ore., up 36%, and Pamida, Omaha, Neb., up 56%.

But investors brought bad news to Venture, O'Fallon, Mo., depressing its stock 19%, and Value City, Columbus, Ohio, down 33%, x and Rose's, Henderson, N.C., down 95% for its Class B shares.

In another sign that regional problems aren't confined to the northeast, Alco-Duckwall, Abilene, Kan., canceled an initial public offering last month because the IPO market had softened after the chain announced plans to go public.

Among the regionals, Ames was the big winner, gaining 86% since December 1992 to close June 30 at $3.25. Its stock traded as high as $6.50 on March 29, which would have given investors a 271% gain if they had sold their positions then.

The big reason for the stock performance for a chain that not too long ago was out of favor both with investors and shoppers is its new chief executive officer, Joe Ettore. Ettore departed Jamesway after returning from a successful stint at Stuarts, where he lead that chain out of Chapter 11.

Ettore is staking Ames' future on fashions and contends that the smaller size of the chain makes it more nimble in ordering fashion goods than either Wal-Mart or Kmart, thus giving its customers smarter selections. Savvy investors see the upside potential for Ames to increase margins on the soft goods side of its business.

Moreover, a large number of insiders have been buying Ames stock, albeit in small bits and pieces. Despite the small size of the individual stock purchases, the large number of insider transactions has sent a message to Wal-Mart. In addition, the stock trades at a low price/earnings ratio of six, another point in its favor.

Caldor also has been good for shareholders, turning in a 56% gain over 3 1/2 years. Although the gain wasn't all that spectacular when averaged over those years, it nonetheless was enough to put it in second place in regional chain performance.

And Caldor lately has been doing all the right things that make retail investors happy: growing same-store sales by 6.8% in June, with total sales for the month gaining 20%. Strong apparel sales, aided by warm weather, along with good results in housewares, toys and home textiles, helped the company exceed expectations on Wall Street.

Given the recent successes at Pamida, the chain may be on the verge of enlarging on its small following on Wall Street. Its stock hit a two-year high of $6.88 in mid-1994 after announcing it will open 17 new stores next year, an increase from 10 to 12 it originally projected.