Byline: Mark Tosh

NEW YORK--Despite efforts to convince Wall Street that it has its house in order, uncertainties hang over Hills Stores Co., where the stock continues to lag and executives are departing for other firms.
The latest departure was announced Friday, when Robert J. Stevenish resigned to become executive vice president of operations at Montgomery Ward. Stevenish had been Hills' executive vice president, store and distribution operations, since 1992. He became senior executive vice president and chief operating officer in July after three top executives, including chief executive officer Michael Bozic, resigned. The resignations followed Dickstein Partners' victory in a proxy battle for control of the company's board.
Just two days before his announcement, Stevenish--along with Mark Dickstein, Hills chairman and president of Dickstein Partners, and Jack Smailes, president and acting ceo of Hills--attempted to allay Wall Street concerns about Hills during an analysts' presentation here. The stock remained unchanged that Wednesday at 13 5/8 on the New York Stock Exchange. In July, Hills' stock rose to $24 following Dickstein's proxy victory, but the shares have since dropped as low as 12 1/4. On Tuesday, Hills closed at 13, down 3/8.
Meeting with more than 100 analysts and bankers at the Intercontinental Hotel, the Hills team gave its outlook for the second half: a 0.5 percent increase in same-store sales and an EBITDA projection of $137 million for the year.
"There's a lot of positives about the company, but they tried too hard to say everything is fine," said one analyst who attended the session but asked not to be named. Ironically, management "consistency" was highlighted during the presentation and in a WWD interview right after it.
"The people who really ran the operations of our company, who bought the goods and sold the goods, they're still running the company," Smailes said in an interview with WWD. Except for some concerns about lackluster sales trends, Smailes said, "I think the organization continues to be a positive and aggressive organization like it always has been."
In addition to Stevenish and Bozic--who is credited with leading the 159-unit Hills out of Chapter 11 in 1993--John Reen, chief financial officer, and Andrew Samuto, executive vice president of real estate and support services, resigned in July and collected big severance packages. At that time, Smailes and Stevenish also resigned but rejoined the company under Dickstein's leadership. Hills has changed 82 percent of its executive team over the last three years. Hills, which already does about 50 percent of its $1.9 billion volume in softlines, is taking steps to increase apparel sales by testing career lines. The chain historically has focused on casual apparel, Smailes said.
"We've had excellent success [with the career test] and we'll be expanding it," he said. Last year, the regional discounter added petites to its stores.
Last month, Hills said it retained Bear Stearns & Co. Inc. to evaluate any bids to acquire Hills and assist the board in maximizing shareholder value in the near term. Some analysts at the meeting last week said the presentation raised more questions than it answered.
Rick Church, an analyst at Smith Barney, said there was no indication of any real offers or whether Dickstein would find a buyer for Hills. During the proxy battle, he pledged to bid $27 a share for Hills in an auction for the chain, but later withdrew the offer, citing higher-than-expected severance payments and refinancing charges.
"I think it's apparent that there isn't a likely candidate for buying the company," Church said. "I think they're searching for what the strategic alternatives are."
Church said the second quarter was particularly poor for Hills and that management attributed the performance to an "overly aggressive plan" and high inventories. Hills reported a loss of $45.2 million in the quarter, including a $43.3 million charge for severance and refinancing payments.
Church added, "There's a decidedly negative cloud hanging over them now, whereas a few months ago everything was looking pretty good."
According to the analyst who asked not to be named, "If the chief operating officer, the guy who is running the stores, is not there any longer, then that's another big hole in their management structure. It wasn't a piece of news we wanted to hear."
The analyst also expressed doubts that Hills could meet or exceed last year's EBITDA of $137 million, since total sales rose just 1.1 percent through August and same-store sales declined 2.4 percent.
"It's not like they're in any kind of dire straits, but I don't know how they're going to get to that [EBITDA] number," the analyst said.
Hills was able to outperform many retailers last Christmas, the analyst said, because it drew shoppers into the store with its stock of Power Rangers toys. There are no signs of a similar must-have item emerging this Christmas to boost sales.
Still, Hills' cash flow and balance sheet are "in fine shape," and the company has $300 million available on a credit revolver with only $115 million withdrawn, the analyst said.

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