Much-criticized Rykoff may have more bad news; third-quarter earnings expected to be sharply lower.

Much-criticized Rykoff may have more bad news

Third-quarter earnings expected to be sharply lower

Rykoff-Sexton Inc. is still in the frying pan after disclosing last month that third-quarter earnings -- expected to be released during today's board meeting -- will fall well below expectations. Now some institutional investors are pushing for the L.A.-based food service giant to contain costs and produce more consistent earnings.

Rykoff cut about 200 warehouse employees, but not in time to have a significant impact on earnings this quarter.

"The adjustment in employees should benefit somewhat," said Victor B. Chavez, chief financial officer for Rykoff. "But that adjustment won't really begin to show until the next fiscal year."

One money management firm, Beverly hills-based CMB Investment Counselors, sold about 160,000 shares of its Rykoff stock (9.4 million shares outstanding) last fall.

Other institutional investors have said they are disappointed that "overly optimistic reports from the company" have not panned out in quarterly earnings, though they asked not to named.

"They weren't providing consistent earnings," said Kevin Cavanaugh, an analyst with CMB. "We had been looking for steady growth and margins. We lost confidence in the stories coming out of Rykoff."

The Wisconsin Investment Board, however, has not lost confidence. Owners of 8.1 percent of Rykoff common, the $10-billion public employee pension fund is bullish on Rykoff, believing that earnings problems are temporary.

Roger W. Coleman, president and chief executive officer of Rykoff-Sexton, last month said earnings for the third quarter ended Jan. 27 would amount to only 5 cents a share, compared to 38 cents the year before.

The day after his estimate, Rykoff stock fell 23 percent and $5 from $21.875 to $16.875 -- the biggest percentage loser on the Big Board that day. The stock has held there since, closing last week at $16.375.

"Rykoff's numbers are not where they should be," said Clinton O. Mayer III, an analyst with New York-based Bear Stearns & Co. "And the company's marketing is not what it should be. To get back on track, Rykoff needs to be more aggressive in its marketing strategy. It needs major reductions in the cost of its operations."

According to the three analysts contacted, Rykoff's steep drop hinted at a general lack in consistency from the company.

Over five years, Rykoff's stock has defied pattern. In 1986, Rykoff posted earnings of $1.21 a share. In 1987, Rykoff's earnings were $1.11 a share, followed by $1.48 a share in 1988 and $1.75 in 1989. Analysts predicted earnings between 90 cents a share and $1 a share in 1990.

"Rykoff is a frustrating stock to follow," said James J. Murren, an analyst with New York-based C.J. Lawrence, Morgan Grenfell Inc. "Here's a company with an excellent reputation in its trade, but it can't seem to get its head above water in terms of operating expense. At most, Rykoff gives you two good quarters in a row and then it whacks you."

Two institutional investment analysts criticized two recent moves by Rykoff's management.

* Rykoff is buying its 18.2-acre warehouse and distribution center near Alameda and Seventh streets from Los Angeles-based Lowe Development Corp. Escrow is expected to close by the end of December 1990 or early 1991 on the $30 million sale.

With earnings eroding, the analysts said buying the 90-year-old facility is unnecessary. Rykoff has leased the space since 1945.

According to Chavez, the purchase will free Rykoff to renovate the space, making it more efficient.

* Rykoff's March purchase of Des Moines, Iowa-based Tone Bros. Inc., a privately held institutional food service supplier, has been more than disappointing thus far.

"Tone Bros. has clipped the company's earnings precipitously," said one analyst.

"Tone Bros. has been a negative contributor to earnings over the last six months," said Murren. "Frankly, Rykoff can't afford acquisitions when its operating expense is so high."

The Tone acquisition boosted Rykoff's share of the $122 million U.S. spice market about 1 percent to nearly 8 percent.

Then, too, sluggish food prices do not bode well for Rykoff, according to analysts.

"Food distributors do well in a market with rising food prices," said Mullen. "I believe we are in a period of disinflation on food prices, which places Rykoff's margins under pressure. Right now, they just aren't efficient operators."

Rykoff-Sexton, known for pea-green trucks with the slogan, "Enjoy life. Eat out more often," supplies restaurants, cafeterias, schools and hotels. "This is a solid business and there's no reason why it can't return to profitability, if it can control its operating expense," Mayer said.