Hills begins long climb back - Hills Department Stores

Discount Store News, Jan 21, 1991 by Laura Liebeck

Hills Begins Long Climb Back

CANTON, Mass. -- Hills Department Stores has embarked upon a new cost-cutting and store remodeling strategy designed to enhance its competitive position and improve profits.

Earlier this month, Hills said it will close 28 stores in seven states--half of them former Gold Circle units--by spring, lay off 3,000 workers, pay off $200 million of its enormous debt and initiate a store remodeling program.

The chain also said that it will take a non-cash charge of $125 million against fourth quarter earnings as a result of the restructuring that includes the 28 store closings.

Schottenstein & Co., Cincinnati, is handling the going-out-of-business sale at the 28 stores.

Hills retained Smith Barney, Harris Upham & Co. and The Argosy Group to serve as financial advisors and help raise additional capital. The discounter expects to offer a specific plan to restructure its balance sheet, debt included, by the end of the month. The plan should reveal how the company will raise another $75 million to $100 million.

Hills does not plan to file for Chapter 11 protection, said president John Brouillard, who replaced former president and chairman Steve Goldberger last month. "Chapter 11 is not in our vocabulary," he said.

Hills executives, led by Brouillard and Gene O'Donnell, senior vice president, merchandising, are now reviewing the chain's merchandise lines and store fixturing programs to develop a new store prototype that will emphasize company strengths and provide a fresh, new look for the 1990s. Store refurbishment, not expansion, will be the cornerstone of Hills' strategy for the coming years.

The new prototype model should be completed this spring and elements of it will debut in a few units this summer, said Brouillard and O'Donnell, in a conference call interview with DSN. The renovated units are expected to cost between $400,000 and $500,000 to complete. After the initial stores open, Hills will renovate at the rate of 30 units a year, they said.

Some new features expected in the prototype will be fixturing in apparel, enhanced selections in domestics and jewelry and better use of the cube space. Brouillard said a 10% sales increase at the remodeled units is "achievable."

Currently, the chain is looking at cutting unnecessary costs and paying off debt. Brouillard said his goal is to slice $200 million from Hills' debt load this year and achieve a 2 to 1 cash flow to interest expense ratio by the end of spring.

Hills will realize a $10 million cost savings as a result of the store closings plus another $10 million annually in overhead costs associated with operating the stores.

Cash flow, which includes about $50 million in annual depreciation and amortization, remains strong, the company said. On Dec. 31, 1990, the discounter made its scheduled $43 million principal payment to bondholders of its senior notes, showing that the chain was liquid during the crucial fourth quarter when retailers are supposed to have cash.

Prior to this, Hills said it revised its lending agreement with its bank group.

The crucial Christmas season proved a fairly good one for Hills, particularly in girls' and ladies' apparel, electronics, toys, housewares, H&BA, candy and domestics. The chain said that sales for the four-week December period, ended Dec. 29, 1990, rose 6.6% to $315.5 million over the same time in 1989. Same store sales for December rose 5.7%. Sales for 47 weeks, ended Dec. 29, were up 4.8% to $2.047 billion. Same store sales rose 2.2%.

Hills expects to post an operating profit of somewhat under $100 million this year on sales of between $2.1 billion to $2.2 billion from 214 units. The company reported a net loss of $36.1 million through the first nine months, ended Nov. 3, 1990. Next year, Brouillard projects annual sales will be between $1.8 billion and $1.9 billion from 186 stores. He declined to project operating profit or net income.

In 1989, Hills recorded sales of $2.07 billion. Operating profit was $108.1 million and net income totaled $5.6 million.

The 28 store closings, located in New York state and Ohio, will mean that Hills is vacating Rochester, N.Y., and Columbus, Ohio, markets. Hills will maintain stores on the outskirts of Columbus, however.

All of the units, 15 of them former Gold Circle units, are being closed because of poor performance. The units were not meeting sales and profit objectives, said O'Donnell, who characterized the acquisition of some of Gold Circle units as "a mistake."

O'Donnell and Brouillard noted that as an upscale discounter Gold Circle was located in more affluent areas than a typical Hills and that customers were accustomed to using credit cards and waiting for ad circulars, both elements absent from Hills' traditional operation. The changeover to the Hills format was perceived by customers as a downgrading of the units, and did not provide a "conducive shopping experience" for Gold Circle customers, said McDonnell.

"We have not progressed as much as we should have in updating our fixturing," he added.