Deep pockets keep Woodward & Lothrop afloat

THE BALTIMORE SUN

New York -- A series of poor earnings reports from majo public retailers have received widespread attention in the press, but the rockiest results for a major department store chain may be the ones coming from privately held Woodward & Lothrop.

A rare window into its performance for its last fiscal year, which ended Jan. 31, was opened recently in a report by Salomon Brothers, Woodie's investment bankers. The incomplete but indicative numbers (Woodie's confirms their accuracy) raise tough questions about the retailer at a time when Wall Street has become euphoric about the prospects for the best capitalized and best performing companies in the industry, and highly skeptical of others.

Woodward & Lothrop's results are so poor, however, that the contrast may not be applicable. For the fact that Woodie's has survived at all may suggest that any attempt to forecast its demise using ordinary measures is irrelevant.

That is because Woodie's has a rich parent, Taubman Investment Co., owned by Michigan-based Alfred Taubman. If Mr. Taubman wants Woodie's to survive, and Mr. Taubman continues to be worth as much as publications like Forbes say he is (about $2.2 billion), it will survive.

So far, he has and it has, with additional Taubman infusions last year bringing his total investment to $162 million. "There is an absolute commitment," said Woodie's Vice Chairman Robert Mulligan.

More will probably be needed. The end-of-January numbers show sales fell 4.4 percent, from $913.4 million to $873.4 million, from the year before. Even adjusting because of a one-week difference in the period, Salomon calculates sales still fell $28.4 million, or 3.1 percent. On an operating basis, the company lost ++ $5 million, in contrast to earnings of $18.1 million during the fiscal year that ended in early 1990, and Mr. Mulligan suggests that one less week probably didn't matter.

While earnings are one measure of performance, if Woodie's is to be considered in the same manner as any other highly leveraged company, the operating and net income numbers are far less relevant than the company's capacity to produce enough cash to cover the interest stemming from large debt. To get a sense of this, bankers go through an exercise of eliminating from the net ++ figures the depreciation, taxes and numerous other expenses. They call the results cash flow.

It tends to be a far more robust number than operating earnings. And typically, cash flow will be three times the interest charge for even those companies with leveraged-enough financial structures to have non-investment grade BB (or "junk") debt ratings, said Jo Anne Legomsky, a Standard & Poor's analyst. Financial reports for very well-capitalized retailers, such as Wal-mart Stores, Melville's and Woolworth's, produce cash flow-to-cash interest ratios in the mid-double digits.

In Woodie's case, Salomon reckons cash flow of $28.9 million and cash interest obligations of $42.6 million (total interest was $3.5 million more), giving it a ratio of 0.68 -- a number several junk bond analysts suggest is, to say the least, unusual for a company still in business. In contrast, Macy's, despite all the publicity stemming from recently reported operating losses, has never seen its cash flow-to-cash interest ratio slip below 1-to-1. Nor did Allied Stores before it entered bankruptcy more than a year ago.

Woodie's went to great lengths to have Salomon publish a second cash flow number that diverges from generally accepted accounting principles that reflects inventory adjustments and the impact of a complex financing. The adjustment raises cash ** flow to $34.4 million, a shift that does have financial implications but doesn't change a central fact: Cash flow still does not cover cash required for interest.

Not surprisingly, given the company's performance, bonds issued in 1985 now sell for 53 cents on the dollar, according to Salomon. The most striking aspect of the price is that they sell for anything at all. The cash flow shortfall last year was so significant that it didn't even cover the interest on bank loans and other forms of senior debt that by rights must be paid off before the bonds.

The reason appears to be an indirect and direct result of Mr. Taubman's involvement -- indirectly, because his name inspires confidence; directly, because last year Taubman Investment Co. injected $22.9 million into Woodie's that was used to repurchase bonds. That, plus earlier purchases, reduced the amount of outstanding bonds from $130 million to $83.5 million, producing a savings in interest of almost $7 million.

It was a transaction that was viewed with relief by sellers as much as buyers. "I just looked at Woodie's as fairly weak and not getting better any time soon and therefore not worth the risk," said Deborah Pederson, a portfolio manager at IDS Financial Services, who chose to get out when offered the chance. "We tend to like to own things if they stand on their own. It is really a

gamble to guess when someone with big pockets will walk away. I'm not in his [Mr. Taubman's] inner circle."

The transaction, Ms. Pederson said, could be viewed as an out-of-court bankruptcy restructuring, with the company satisfying creditors at less than 100 cents on the dollar but sparing them litigation. There was, however, no formal offer or negotiations to repurchase the bonds. And Mr. Mulligan contends that though the company may buy the bonds occasionally, depending on price, creditors ultimately will be fully paid off.

While a deep-pocketed owner can stave off death he cannot, necessarily, produce profits. Whether Woodie's can survive remains a question. Certainly, however, some of its current problems could be considered either cyclical or controllable.

First, the 17 flagship Woodward & Lothrop stores and 15 John Wanamaker units are spread between Washington and Pennsylvania, an area in recession.

Second, sales may have been artificially constrained because of a fast remodeling program that reduced capacity. Mr. Mulligan said that a $200 million capital program that began in 1988, including a $60 million renovation of the flagship Wanamaker store in Philadelphia, is now four-fifths completed, increasing and improving floor space and reducing a heavy drain on cash. In Philadelphia, at least, Mr. Mulligan contends Woodward & Lothrop is now actually gaining market share.

To succeed, however, the company must fight for business in an area where other operators are not only good merchandisers but also are far stronger financially. Even with the debt buyback and other financial twists to reduce borrowing, Woodie's interest costs last year still equated to more than a nickel out of every sales dollar, compared to less than 3 cents of every sales dollar for May Department Stores (Hecht's) and about 2 cents for Nordstrom Inc. And Salomon projects Woodie's debt, and interest costs, should actually increase in the year ahead, a circumstance the company says stems from additional debt being incurred to fund last year's cash flow shortfall and the continuing capital rebuilding program.

Even if Woodie's can't make it under its current ownershipinterest is rumored to exist in the franchise, though Mr. Mulligan asserts there have been no discussions of a sale. May Department Stores, for instance, is mentioned as a potential buyer of the Wanamaker stores and Dillard Department Stores as a buyer of the Washington branches. Companies, like people, enjoy shopping.

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