Pacific Enterprises will not put Thrifty on sale, despite rumors.

Pacific Enterprises will not put Thrifty on sale, despite rumors

Amidst fanfare and furrowed-brow analyses, in 1986 utility giant Pacific Enterprises, parent of Southern California Gas, bought retailer Thrifty Corp., in a move to multiply profits.

But instead, for five years the mating of the Los Angeles-based corporate behemonths has been almost barren of black ink -- and now the gossip is that the marriage has soured.

The huge SoCalGas operation is fine, reporting record operating income last year of $226 million, revenues of $3.19 billion. But Thrifty lost $64 million last year, also on $3.19 billion, is wallowing in the recession and is expected to report losses again this year. Margins have been suffocated.

"Some analysts speculate the utility concern is preparing Thrifty for a sale, possibly a management-led leveraged buyout," wrote Mira Slott, editor of the New York-based trade publication Housewares Executive, in a recent issue.

But last week Pacific Enterprises Chairman and Chief Executive James Ukropina said no break-up is contemplated and a major Thrifty store rehab is under way.

"Thrifty is not for sale, there is no management LBO being considered, the rumors are false," Ukropina flatly stated. "In fact, as we speak we are bringing a new line of merchandise into Thrifty stores and implementing new layouts in about 50 of the stores in Southern California."

If the Pacific-Thrifty marriage is infertile, it is not for lack of positive input from Wall Street.

A perennial pet among analysts, Pacific Enterprises hit $61.25 a share back in 1987 -- shortly after the buyout -- amid heady talk that SoCalGas cash could provide staying power for forays into the lucrative retailing world. After all, with 4.6 million customers in the steadily growing Southland, SoCalGas is the picture of a healthy utility throwing off cash.

Instead, Pacific Enterprises stock has been making monkeys out of the analysts almost ever since the big merger.

Despite repeated buy signals from Dean Witter, Duff & Phelps, Standard & Poor's, First Boston, Merrill Lynch and a host of other investment advisers in the last five years, Pacific Enterprises last week traded in $27-a-share range on the Big Board -- less than half its 1987 apex.

One indicator of the severity of the $6.92 billion-in-revenues Pacific Enterprises' plight, at least from the shareholder's perspective: The company's estimated earnings, $2.05 a share in 1991, will be the lowest since Lyndon Johnson was president -- even before adjustment for inflation.

Last month, the bombshell was dropped: Chairman Ukropina whacked the company's much-hallowed dividend in half, to $1.76-a-share from $3.48, after months of assurances that no dividend cut was planned.

Stock dilution has played the villain's role in the savaged earnings-per-share picture at Pacific Enterprises.

The 1986 acquisition of 671-unit Thrifty and a 1988 buyout of the 124-store Pay'N Save drug store chain were accomplished by stock swaps, creating 21.9 million new shares out of Pacific Enterprises current 70 million shares outstanding.

Stock has been created, but corporate profits have sagged, eviscerating earnings per share, one of Wall Street's totems. Also, more shares strained Pacific Enterprises' ability to pay its dividend, just as free cash became tight. On 70 million shares, the $3.48 dividend was costing more than $240 million a year.

The merger has made Pacific Enterprises into a hybrid stock. "It would be inappropriate for investors to look at Pacific Enterprises as Pacific Lighting (the old holding company, primarily made up of SoCalGas). Retail stocks generally pay out less in dividends than utility stocks," said Chairman Ukropina last week.

Certainly a dividend increase is out at Pacific Enterprises through 1992. The recession is eating at West Coast retailers and the 31,300-employee Thrifty Corp., with 1,054 stores spread out over the Western and Midwestern states, looks as far away from profits as ever. Under the Thrifty corporate umbrella are drugstores Thrifty Drug, Thrifty Jr. (about two-thirds of Thrifty Corp.) and Pay'N Save, plus sporting goods shops Big 5 and Gart Bros., which operates in the Midwest.

The sporting goods stores are fending off the recession but Thrifty Drug, a sort of "grab-bag" store, is not.

As a throwback to the 1960s shopping experience, Thrifty's shoppers can get prescriptions filled, while buying cameras, liquor, lawn chairs, Jonny Cat litter, Black Flag Ant & Roach Killer, Frank Sinatra's Milano-style Pasta Sauce, cosmetics, costume jewelry, paper, pencils and other drug store staples. Thrifty also sells ice cream cones, made at its own ice cream plant and winner of 36 state fair gold medals in a row.

It is difficult to distinguish what Thrifty offers from other stores, such as K mart or Ralphs, according to some retail gurus. "In the health/beauty/drug business, everybody is looking like everybody else. Supermarkets and discounters are nibbling away at various product lines," said Laurence Wortzel, of the Boston-based MAC Group consultants.

Pretax operating margins at Thrifty Corp. have shrunk to 1.5 percent last year from 4.8 percent in 1986, as shoppers bought less Jonny Cat and Frank Sinatra sauce.

Seeking an answer to what is beginning to look like a $3 billion lemon, last December Pacific Enterprises hired Eve Rich, 50, former executive at Los Angeles-based Contempo Casuals women's clothing chain, to be Thrifty's new president.

Reputed to have turned Contempo around, Rich is nothing if not a blunt talker. In a June newsletter to 40,000 Pacific Enterprises employees, she scored Thrifty as "dated" and having "merchandise (that) is uncreative and tired and prices (that) are too high. Oftentimes there's not enough staff in the stores."

Pilferage was a major problem too, she added.

As if to underline the plight, Chairman Ukropina implored employees in the same newsletter to shop at Thrifty to aid the "turnaround" effort.

New top-gun Rich has implemented a Thrifty program of unprofitable store closures -- 51 to date -- and has started a new program to upgrade stores while cutting prices.

Rich has brought in a new management team and is targeting female buyers. Interestingly, prior to a Rich-inspired survey, Thrifty thought it was serving male shoppers, but it turned out two-thirds of "Thrifty people" are women.

Cash register scanners have been installed in stores, allowing better inventory control. Rich has promised her inventory buyers will seek out better goods.

Can Thrifty begin posting profits -- and if so, blot enough red ink to gas Pacific Enterprises dividends back to $3.48 share?

"We would be hopeful that some day we could raise the dividend, but I'd rather not say when because that speculates about future earnings," said Ukropina last week. "We are in a recession and, as you know, Southern California is particularly weak."

Retail industry denizens were also wary last week. "There is a lot of pessimism about that (a Thrifty turnaround) in the industry right now," said Slot, editor of the Housewares publication. "Retailing is tough."

PHOTO : Awaiting new merchandise: An L.A. Thrifty

PHOTO : Ukropina: His denial was unequivocal