Raven: Hills to focus on building traffic - Gregory Raven, Hills Stores Co. president

Discount Store News, May 6, 1996 by James Mammarella

NEW YORK -- "We have plenty of fundamental blocking and tackling to do," said Gregory Raven, who became president and ceo of Hills three months ago. Fresh from a presentation to analysts and investors April 24, Raven told DSN that Hills will not seek to acquire another chain for at least 10 to 20 months.

Hills had modestly good operating results in a difficult environment. Sales grew 1.5% in 1995 to $1.9 billion, but EBITDA dropped 13.6% to $119 million. Raven's focus: "a new advertising campaign, rounding out the management team and improving our internal systems."

Raven helped lead drugstore chain Revco out of bankruptcy. He believes that Hills, which has good rates of margin (27% of '95 sales) and cost control (SGA was 20.4% of '95 sales) relative to its class of trade, can thrive by focusing on building store traffic. Executive vp, gmm Jim Feldt said that the comp store sales goal for '96 is a low single-digit increase and projected flat gross margins.

Hills operates 164 stores. All have been rehabbed or newly built within the past five years. The chain will open only one new store this year, a unit in New Castle, Penn., to debut in October.

The plan calls for three to five new stores each year over the next few years. Other individual units or clusters of stores may be acquired opportunistically, if they are within or close to Hills' market concentrations like Pittsburgh, Cleveland and Buffalo.

This is a direct shift from the geographic initiative of former ceo Mike Bozic, who took Hills boldly into the Mid-Atlantic region with new stores in Virginia, and who projected opening a dozen new stores each year.

With Hills' cash reserves and market capitalization lower due to fallout from the change of control, a more conservative store expansion strategy has prevailed. Lacking the wherewithal to build out from the Virginia beachhead, Raven is clearly less than ecstatic about the logistics cost of supplying the Virginia stores, which form a salient isolated from the chain's Midwestern base.

Raven said that Hills will remain committed to its everyday low price strategy. A decade ago, the chain did more TV ads and very little circular advertising, but now has an annual schedule of 37 circulars. Raven will cut back on print and unleash a major TV image campaign.

The remaining key hire at Hills is an executive vp of stores to fill the post vacated last fall by Bob Stevenish, who left for Montgomery Ward.

Hills' new execs will oversee a significant upgrade of computer systems and address the chain's operations side. The 1 million-sq.-ft. DC in Columbus, Ohio, is considered to be outdated.

Hills will project a consistent value message to customers. It will not upscale, although Feldt acknowledged that the chain has beat the familiar regional discount retreat from hardware and automotives. Unlike other upscaling regionals, Hills will not cut back on toys, which provides 13% of its volume.

The chain enjoys a strong children's apparel business and a reputation for fashion selections that rival chains with far greater resources. Wide assortments will continue to prevail in apparel and soft home, which account for 48% of Hills' sales.

Hills recently redeemed its 10.25% senior notes and made a successful $195 million sale of 12.5% senior notes. The move was made to avoid a $7.5 million charge stemming from the change of control last year. Hills has a $300 million credit facility, which expires in April 1998.

Raven said that Hills will prosper by reinvigorating its traditional strengths.

Last summer, former Hills chairman Mark Dickstein had said that he would sell the chain to the highest bidder. By early '96, with the stock having plunged to half of its previous value, Dickstein said that the chain should seek acquisition targets and that Raven and Hills director Chaim Edelstein were the ideal team to "explore the merits of combining with other regional discount retailers."

However, with the poison pill defense of the former management having cost Hills $45.5 million in pretax charges last year, '94 earnings per share of $2.73 soured to a loss per share of $1.66 in '95. Shareholders turned less sanguine about Hills' short-term plans. Several shareholders have filed suit since last August, accusing Dickstein Partners of making false and misleading statements. The lawsuits, said corporate counsel Bill Friend, are in preliminary discovery stages and are likely to proceed without final resolution for years.

The seven-member board of directors that took control in July '95 was hand-picked by Dickstein, but he is downplaying his visibility. He resigned as chairman in February, and his hand-picked successor, Edelstein, is essentially in a consulting role with the day-to-day management.