MONTGOMERY WARD’S FOURTH-QUARTER LOSS SAID TO BE $160M
Byline: Sidney Rutberg
NEW YORK — With Montgomery Ward bleeding cash — reportedly $160 million in the fourth quarter — factors are hoping majority owner General Electric Capital Corp. will step in with additional financial support for the struggling retailer.
In the first nine months of 1996, the company lost $120 million before tax benefits of $48 million. Sales were off about 10 percent to $4 billion.
Although fourth-quarter figures haven’t been posted yet, sources said the loss for the period will be in the neighborhood of $160 million, reflecting heavy markdowns.
Meanwhile, the retailer is in the midst of a restructuring, searching for a clear niche and narrowing categories that haven’t been successful.
One factoring executive called Ward’s retail business “completely out of control.”
According to a company letter accompanying the third-quarter 10-Q, results were hurt by competitive conditions and the cost of clearing out merchandise in repositioning the company.
The plans are to narrow hardlines and apparel assortments, emphasizing denim, activewear, team sports wear and Disney and Warner characters.
The letter notes that aggressive clearance efforts in the fourth quarter should enable the company to enter 1997 with “improved inventory content.”
As a result, the letter concludes, “management expects earnings to rebound in 1997 due to fewer markdowns and improve sales and total margin rate.”
Essentially, factors are hoping for an injection of new capital or credit guarantees from GECC. But attempts to obtain GECC’s guarantees have been unsuccessful, according to several factoring executives.
Factors are moving to limit their exposures, which are huge, reportedly in the tens of millions of dollars. They are either trying to share the risks on shipments to Ward’s with their clients or are holding back on new shipments until payments are received on older shipments.
Some factors are working out deals calling for the client to take the first 20 to 25 percent of any credit loss, with the factor eating the rest. This arrangement roughly covers the clients’ costs of merchandise shipped and limits the factor’s exposure.
In response to queries about the reports from factors, Ward’s issued the following statement to WWD on Friday:
“Montgomery Ward has a supportive bank group, which provided added liquidity to the company in late 1996 in the form of additional and significant new banking facilities. “Contrary to previous press reports, these facilities provided significant liquidity for Ward for 1997.
Ward’s buying volume and strategic vendor relations continue to provide the company with ongoing supplier commitments. In the light of our liquidity, which is more than ample to cover our operating needs, Montgomery Ward has initiated discussions with selected trade sources in order to obtain financial benefits from renegotiated payment terms. The factoring and vendor communities continue their support of Montgomery Ward.”
Asked about the $160 million fourth-quarter loss, a Ward’s spokeswoman added that fourth-quarter figures will be available “at the end of February, at the earliest.”
There is also an active market for trading Ward’s receivables.
Last December, maturities of under 120 days were trading at around 93 to 94 cents on the dollar.
The price slipped down to the mid-80s in January, but moved up to the 90s for maturities shorter than May. However, prices being quoted for Ward’s receivables maturing in May or June are in the low to mid-80s.
Factoring executives don’t see GECC walking away from Ward’s because of its large investment in the company. Additionally, while Ward’s retail business has been losing money, the credit-card operation and an insurance subsidiary remain valuable properties.
GECC did not return phone calls seeking comment.
Generally, Ward’s has been paying its bills on time, but in better periods, the chain could demand and receive credit terms of 120 days, about 60 days longer than traditional industry terms.
Now, however, a number of factors are cutting back on the length of terms to Ward’s.
One factoring executive, who noted that Ward’s has been paying on time under the retailer’s own terms, added: “Going forward, we’re not going to accept any terms longer than 60 days on shipments to Ward’s.”
As of the end of the third quarter, Ward’s had $385 million in unused borrowing capacity, compared with $230 million a year earlier.
GE’s original equity investment in 1988 when it, along with management led by Bernard Brennan, purchased Ward’s from the Mobil Oil Co. was only $5 million for 50 percent of the equity.
It has since invested $175 million in preferred stock to finance the acquisition of Lechmere and Amoco Motor Club and has a $55 million piece of Ward’s $165 million revolving credit line.
Last month, Brennan was replaced as chief executive officer by Roger V. Goddu. According to a filing with the Securities and Exchange Commission, an agreement effective Jan. 7, 1997, gives Goddu, formerly president of U.S. merchandising for Toys “R” Us, the right to appoint two board members. As a result of the change, GECC controls two-thirds of the board. Before Toys “R” Us, Goddu was at Target as senior vice president and general merchandise manager.
The Ward’s spokesperson said, “With the appointment of Roger Goddu as chief executive officer, vigorous new business and financial plans are being developed with the management team.”
In the letter accompanying Ward’s third-quarter 10-Q, the company notes that GE Capital is the 100 percent owner of Ward’s credit card business and holds more than $5 billion in customer receivables.
“This asset represents 25 percent of GE Capital’s proprietary credit card portfolio, and GE Capital’s earnings from the portfolio are substantial, generating a significant return on investment.”
According to trade reports, GE Capital earns more than $100 million a year from the credit card business.
In addition, the insurance subsidiary is also seen as a valuable asset.
Some analysts put the insurance company’s value at $1 billion if sold as an independent operation.