MARSHALLS' SALE TO TJX GIVES OFF-PRICE GIANT ANOTHER 495 STORES
Byline: Jennifer Brady
NEW YORK--In another major consolidation underscoring retailing's difficulties, Marshalls will be sold to TJX Cos. in a $550 million deal, creating a $7 billion off-price juggernaut. The announcement, made Monday by Melville Corp., Marshalls parent, and TJX, confirmed weeks of rumors surrounding a sale of Marshalls. The companies said they signed a definitive agreement under which the 495-unit Marshalls will be sold to TJX for $375 million in cash and $175 million in TJX convertible stock. In the Eighties, Marshalls rose to become the nation's dominant off-price chain. In the Nineties, the chain lost ground to TJX, which continues to carry more in-depth brand assortments. With 571 stores, TJX is the country's largest off-pricer. Marshalls had 1994 operating profits exceeding $100 million, but in 1995 is expected to just about break even, sources said. In the latest six months, Marshalls same-store sales fell 11.2 percent. Total sales slid 3.1 percent to $1.2 billion. Off-pricers have lost share to mass merchants and department store chains, which have grown stronger through acquisitions and divestitures and have become more price savvy, promotional and value-focused. However, "TJX is the best in the whole lot of off-pricers," said Jeffrey Edelman, analyst at C.J. Lawrence Deutsche Bank. "A lot of the overcapacity in the off-price industry will be rationalized." TJX officials reportedly said during a conference call Monday with analysts that about 190 stores would be shut over the next two years. A TJX spokeswoman confirmed there would be closings, but wouldn't specify the number of Marshalls or TJX units involved. Melville noted that it will take a $195 million after-tax charge in the fourth quarter for the sale. The deal is also expected to reduce fourth-quarter operating earnings since a large amount of Marshalls' business is during the Christmas season. The closing is expected in the fourth quarter. Sales proceeds will be used to reduce Melville's debt. TJX said that it has already received financing commitments from a group of banks for the cash portion of the purchase and working capital needs. Bernard Cammarata, president and chief executive officer of The TJX Cos., said in a statement the acquisition "enables TJX to capitalize on the significant synergies that exist between T.J. Maxx and Marshalls." He added that to maximize profits and its consumer base, TJX will continue operating stores under the T.J. Maxx and Marshalls names and that both businesses will realize "substantial increases in buying power, economies of scale and efficiencies of operations which will dramatically reduce our expense ratios." He said he expects cost savings to translate into lower prices. "We believe we are very capable of bringing about a meaningful turnaround in Marshalls," he said. "While there is considerable potential in the off-price sector, we recognize there is a need for consolidation," said Stanley Goldstein, chairman and ceo of Melville, in a statement. "We believe it is in the best long-term interests of our shareholders that we not pursue the role of consolidator since it would result in dilution of Melville's management's focus on achieving growth in our other core businesses." In relation with the sale, TJX said it plans to cut its annual common dividend to 28 cents from 56 cents effective for the next dividend to be declared. The previously declared dividend, payable Nov. 30, 1995, is not affected. TJX said it will also eliminate its share repurchase program. Cammarata said that TJX will apply $20 million in annual dividend savings toward financing the acquisition. Janet Mangano, analyst at Midlantic Bank in N.J., said Marshalls and T.J. Maxx had been doing well until 1994, when department stores stepped up sales and "made the need to shop off-pricers less compelling." Mangano said at one time Marshalls was the major profit division for Melville, but now Melville is moving away from the soft goods industry, and emphasizing more growth through its nonapparel businesses. Marshalls operates off-price stores in 40 states and Puerto Rico. In 1994, Marshalls sales accounted for $2.8 billion of Melville's $11.3 billion in volume and reportedly is only marginally profitable. Melville also operates Bob's Stores, a chain of casual apparel and footwear superstores, and Wilsons, which sells leather outerwear and accessories. There has been some speculation that some Marshall's unit could be converted to Bob's. Melville's other divisions are CVS drugstores, Meldisco footwear, Thom McAn, Kay-Bee toy stores and Linens n' Things. "Melville conducted a thorough analysis of the Marshalls business, and the whole off-price industry found that while there is potential, there is also a need for consolidation," said Gilbert W. Harrison, chairman of Financo, a financial adviser to Melville. "TJX offered the best partner to team up with. The combined company will enjoy an unrivaled position in the off-price industry." TJX Cos., based in Framingham, Mass., also operates the Chadwick's of Boston catalog, Winners Apparel Ltd., a 47-unit off-price family apparel chain in Canada and 23 HomeGoods stores. For the year ended Jan. 28, 1995, TJX sales rose 6 percent to $3.8 billion. Net income fell 33.6 percent to $82.6 million from $124.4 million. In the six months ended July 29, TJX reported income from continuing operations of $17.2 million, or 19 cents a share, on sales of $1.68 billion. Following the announcement, Moody's Investor Service said it is reviewing TJX's long-term debt, preferred stock and commercial paper ratings for a possible downgrade affecting $350 million in debt securities. The ratings for review at TJX are: notes and medium notes at A3, two convertible preferred stock issues at baa1, a shelf registration for senior debt at A3 and the Prime-2 commercial paper rating. Standard & Poor's placed its ratings of TJX on CreditWatch, with negative implications affecting $500 million in debt. On Monday, TJX stock closed up 1/2 to 15, and Melville Corp. rose 1/2 to 35 1/2 on the New York Stock Exchange.
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