The worst is over for Carter Hawley Hale Stores; stock should rise, but enormous debt is still a problem.

The worst is over for Carter Hawley Hale Stores 

Stock should rise, but enormous debt is still a problem

Analysts predicted that Los Angeles-based Carter Hawley Hale Stores Inc.'s stock should rise or stabilize in coming months, despite a sharp decline in May.

Shares of Carter Hawley Hale were twice among the big losers on the Big Board late in May, the company having announced third-quarter losses. Dipping down to $4.50 late in the month and rising to trade at $6.50 this week, shares of Carter Hawley Hale have been up and down.

The bumpy ride, however, may be over.

"I think the stock goes back up from here," said David Jackson, a retail analyst with Los Angeles-based H.J. Meyers Inc. "Earnings were off of expectations, which is why the stock went down. But the company has a market capitalization of $165 million. The cash flow, after-tax, is about $2.35 a share for 1990 and I am predicting $2.60 (a share) next year. There is not another retail stock on Wall Street selling as cheaply as Carter Hawley Hale."

Last month, Carter Hawley Hale announced revenues of $31.2 million and a net loss of $6.6 million (24 cents a share) for the third quarter ended May 5, compared with revenues of $35.9 million and a net loss $3.2 million (15 cents a share) for the same quarter in 1989.

Investors were discouraged by the third-quarter earnings, selling off the stock. Management was not.

"Allied, Federated, Macy's and Nordstrom -- all of those retailers were down on an operating basis," said Bill Dombrowski, vice president of corporate affairs for Carter Hawley Hale, "we were only flat. Better than most."

Carter Hawley Hale's earnings from operations were $146.5 million in the first three quarters of 1990, compared with $143.1 million last year.

In their worst slump since 1981, most major retailers are re-evaluating strategies, preparing for the worst. Carter Hawley Hale, however, is already in a good spot, analysts said.

The Commerce Department reported last week that retail sales skidded 0.7 percent in May to a seasonally adjusted $146.84 billion, after falling 0.9 percent in April and 0.4 percent in March.

It was the first time since 1981 that retail sales have dropped three consecutive months. Most major retail chains are focusing on market share and merchandising to compete. They may now be forced to cutback if the slump continues, analysts said.

"We find that there is a special interest among retail clients when sales and profits are waning. Typically retailers cut back and refocus on efficiency," said Howard Schultz, president and founder of a Dallas-based Howard Schultz & Associates Inc., which does overpayment recovery and systems analysis for retailers, including Carter Hawley Hale. "The calculated risk is stretched in periods of recession and depression. Most retailers will look to improve levels of performance in coming years."

Forced into a conservative position because of a heavy debt load, Carter Hawley Hale has focused on profitability for about three years, Dombrowski said. The strategy positions the retailer better than the rest if the retail slump continues, analysts said.

"Profitability is the best thing for it to keep its eye on right now, because of its debt and because of the slump," said Jackson. "Profit margins are crucial in this climate."

Operating margins have improved each year since Carter Hawley Hale shifted its focus to profitability: from 5.1 percent before the shift to 5.9 percent in 1988 and 6.4 percent last year. Jackson estimates margins will improve in the next two years.

But, even with a leaner operation, the 120-member chain of Carter Hawley Hale department stores still struggles to produce profits for shareholders, because of an enormous debt. Carter Hawley Hale's long-term debt is $1.7 billion, up from $1.6 billion in 1989.

Much of the debt was created by the restructuring of the company. In 1987, when Columbus, Ohio-based The Limited Inc. threatened to buy Carter Hawley Hale, Hawley fought back by spinning off its Neiman-Marcus, Bergdorf Goodman and Contempo Casual specialty stores. CHH also paid a one-time $17 a share cash to pacify shareholders, which contributed mightily to the debt load, Jackson said.

"The legacy of debt was left by their restructuring in 1987 and it might be prudent for them to sell individual stores or divisions to pay down their debt sometime down the road," Jackson said.

The obvious property would be Thalhimers, a Virginia-based department store chain with 26 outlets in the southeast, because the rest of Carter Hawley Hale's properties are based on the West Coast, Jackson said. But, even though 75 percent of its business is conducted in California alone, the retailer has no plans to sell Thalhimers, Dombrowski said.

"Our industry is ripe with rumors, this week it's Thalhimers, last week it was that we were being bought out," said Dombrowski. "We don't pay any attention to the rumors any more."

Since the restructuring, the company's retail operations, comprised of department store chains The Broadway Southern California, The Broadway Southwest, Emporium, Thalhimers and Weinstocks, have been streamlined and improved.

"They have taken on a Nordstrom's approach to paying salespeople on commission -- you attract a higher quality of sales people when you pay on commission," said Jackson.

Another analyst agreed.

"The company's restructuring has made it a more competitive company for the 1990s," said Rick Nelson, an analyst at Chicago-based Duff & Phelps Inc. "The focus of their attention is in the department store business. It is better managed and has a real potential to be more profitable as a result of the moves made to fend off The Limited."

Nelson estimated 1990 earnings per shares for Carter Hawley Hale to be 35 cents in 1990, compared to 50 cents a share in 1989. He said any decrease in earnings would reflect anticipated unfavorable accounting adjustments and increased interest expense. Nelson said that 1991 earnings should increase to 60 cents a share in 1991 and more than a dollar over the next five years.