From Z to A: Zayre convert to Ames - former Zarye Corp. discount stores, Ames Department Stores Inc

Discount Store News, Oct 16, 1989 by Peter Hisey

From Z to A: Zayre Converts to Ames

ROCKY HILL, Conn. - The full consolidation of Ames and Zayre operations will move a step closer on Oct. 26 when all but 61 Zayre store signs will come down to be replaced by the Ames insignia. Altogether, 254 locations will change names.

The changes are more fundamental than a quick namechange. All Zayre stores have been equipped with state-of-the-art computerized cash registers and backroom computers which will link the locations to headquarters.

All former Zayre personnel have been retrained in Ames operations, the stores themselves have been revamped with new fixtures and lighting, and goods have been reticketed and repriced to match Ames standards.

Additionally, new merchandising, inventory, operating and financial systems have been installed.

According to Peter Hollis, president and ceo of Ames, this step is merely the public acknowledgment of a process that has consumed the company since the buyout a year ago.

Hollis toured major financial centers in late September, raising $100 million in a convertible debenture offering to retire higher-interest debt and to pay for the changes.

During meetings with potential investors, he noted that while the company posted a loss for the first half of fiscal 1990, the reduction of redundant expenses, the lowering of interest expense related to the Zayre acquisition, and completion of conversions should make the second half profitable.

Comparable store sales were up over 6 percent from last year in both July and August, encouraging the firm to predict a strong second half. In a related development, Moody's Investors Service assigned a B2 rating to the proposed debentures, noting that it expected the turnaround at Zayre to take "several years before returns are brought back to historical levels." However, the rating agency noted that it expected the turnaround to be successful, with operating costs declining as a percentage of sales and margins slowly improving.

Standard & Poor's assigned the debentures a B rating, noting that it expects "shortfalls [in cash generated by operations compared to debt costs] will be covered by existing cash balances, asset sales and mortgage financings."

Here are a few of the most important points Hollis made:

* Seventy-four underperforming Zayres, all tire and lube centers and one distribution center have been closed; * The 61 remaining Zayres, mainly inner city sites, each accounting for over $10 million in sales in fiscal 1989, will rely mainly on broadcast, not newspaper, advertising; * Most of those stores will be remodeled next year, along the lines of Ames' most recent prototype. For some larger units, an entirely new prototype is under development; * By consolidating Zayre and Ames headquarters operations, already substantially accomplished, the company expects to save some $40 million on an annualized basis; * A 1.2 million-square-foot DC will open in spring 1991. By then, the distribution system will be capable of one-day delivery to any outlet; * A satellite communications system will be initiated in November, with all stores on-line by next year.

The most instantly recognizable changes at Zayre will occur in the apparel department, which has been upgraded to Ames' standards - not exactly upscale, but generally of better-than-average discount store quality with a few fashion-forward touches.

According to cfo Duane Wolter, the changeover has "taken a lot of time, a lot of money and an awful lot of work." Digesting such a huge acquisition has obviously strained Ames' resources, and a lot of work remains. As Dun & Bradstreet noted, it could take years to fully incorporate Zayre operations and return them to the levels of profitability Hollis and Ames management feel they should attain.

Hollis last year characterized the acquisition as a calculated risk. His regime, as well as the company's eventual survival in an increasingly difficult marketplace, could ride on the speed with which Ames completes the incorporation of the Zayre division.

PHOTO : Ames president Peter Hollis forecasts a profitable second half after completing the conversion process.