Strouds Making an Upscale Move to Aid Performance.

IT looks like someone has thrown a wet blanket over the stock price of Strouds Inc., but the company hopes to remedy that by repositioning itself.

The purveyor of sheets, bedspreads, bath towels and linens saw its share price climb rapidly to $3.38 a share on Feb. 11, only to tumble to $1.25 as of July 12. Its 52-week low was 88 cents last August, which also represented a five-year low for the stock.

Analysts say Strouds' weak stock price reflects the stiff competition the 70-store chain is facing. The City of industry-based firm is locked in a retail battle that pits the smaller Strouds against bigger domestic retailers that have gobbled up ever-larger shares of the discount linen market and made pricing more cutthroat.

In answer to the competition, Strouds is trying to reinvent itself by venturing into the luxury linen business, where price margins are higher and fewer stores are competing.

Strouds launched its first luxury linen store, called Pure Linens, on May 12 in one of Los Angeles' wealthiest neighborhoods, Rolling Hills Estates on the Palos Verdes Peninsula. The store is located in The Avenue shopping plaza.

Strouds' officials were unavailable for comment last week. But in a recent press release, Strouds CEO Charles Chinni said the company is planning to open a number of other Pure Linens locations in the future.

"The new boutique will be an upscale destination for shoppers seeking luxury bedchamber and bath linens and accessories, which were previously unavailable in even the most upscale communities," Chinni said.

Experts said the new direction of Strouds appears to be a good business decision. "All retailers need to reinvent themselves periodically," said John Grolisch, a partner with Arthur Andersen. "How many stores can your concept grow to before it becomes saturated or cannot sustain double-digit growth? Even Toys R Us had o retool and scale back because of changes in the environment and the economy."

As part of Strouds' turnaround strategy, the company is restructuring its Web site with the help of an online incubator called Guidance Solutions Inc. in Marina del Rey. The goal is to restructure the Web operation so it can eventually be spun off as a separate public company. Guidance Solutions is developing plans and raising venture capital for the redesigned site.

In its pre-existing value-oriented market niche, Strouds' biggest competitors have been Bed Bath & Beyond Inc. and Linen 'n Things Inc. -- the No. 1 and No. 2 home-goods chains in the country, respectively.

Bed Bath & Beyond's sales grew 34 percent in 1999 to $1.9 billion, while Linen 'n Things' 1999 sales grew 22 percent to $1.3 billion. And if Strouds fails to reposition itself, its days may be numbered, analysts said.

"In home furnishings, you have the winners and the losers, and they are two very divergent groups," said Shelly Hale, a financial analyst with Banc of America Securities in San Francisco. "You can imagine where you can put Strouds."

For the fiscal first quarter ended May 27, the company reported a net loss of $2.2 million (31 cents per diluted share), double the net loss of $1.1 million (15 cents) for the like period a year earlier.

Revenue was $54.2 million vs. $53.6 million.

For the fiscal year ended Feb. 26, the company reported net income of $1.3 million (18 cents per diluted share), up from net income of $210,000 (2 cents) for the previous fiscal year. Revenue was $223.9 million vs. $227.5 million.

To boost sales, the company is expanding this year, primarily in California, where 80 percent of its 70 stores are already located. Those new stores are going to face tough sledding if they are geared to Strouds' longstanding value niche.

"The value segment of linens is highly competitive," said financial analyst Hale. "You have Linens 'n Things, Bed Bath & Beyond, Home Place and now TJ Maxx, which is getting into the housewares business. Not to mention the mass merchants such as Wal-Mart, Kmart and Target, which have been very successful in selling their textiles."

Strouds, which has stores in five states, has been struggling in recent years to make its mark. When Bill and Joyce Stroud opened their first store in Pasadena in 1979, they served a niche market.

"I know the numbers have been tough, and there have been a lot of personnel changes," said Jim Ellis, a USC marketing professor who used to work as a buyer with Bill Stroud at Broadway department stores in Southern California. "This is a very competitive business. A towel is a towel is a towel. It is not brand-driven."

SUMMARY

Business: Linens and domestic goods retailer

Headquarters: City of Industry

CEO: Charles Chinni

Market Cap: $9.2 million

Dividend Yield: N/A [*]

Total Liabilities: $72.2 million

P/E Ratio: 64.06

Long-Term Debt: $45 million

(*.) Strouds does not pay dividends.