A TOUGH TURNAROUND AT BROADWAY AS SALES, DEBT TAKE THEIR TOLL
Byline: Michael Marlow and Valerie Seckler
LOS ANGELES — Can David Dworkin make the lights shine on Broadway?
After almost two years of leading a repositioning, there are a few signs of improvement, but no imminent turnaround at the ailing $2.1 billion Broadway Stores Inc.
But Dworkin, the chain’s president and chief executive officer, says it’s only a matter of time before new strategies take hold. He launched turnaround efforts 22 months ago and believes it’s a three-to-five-year job in total to overhaul the business enough to generate positive results, and that it’s a bumpy road to recovery.
“We made some false starts, frankly, in the way in which we organized ourselves, the way in which we structured the business,” Dworkin said during an interview at the rebuilt Northridge store in Los Angeles. “I was naòve to think it would come quicker than it has.”
The department store chain, based here, is still plagued by weak sales gains, heavy debt and a lack of identity in an increasingly competitive marketplace. Broadway filed for Chapter 11 protection in February 1991, suffering from years of neglect, takeover battles in the Eighties and the California recession. It emerged from the proceedings in October 1992.
Analysts do not see a rerun of the event on the horizon and say Broadway has some breathing room for at least a year.
However, unless merchandising changes show signs of consumer acceptance, analysts believe Broadway may be forced to sell stores to maintain cash flow, raise money to renovate antiquated stores and reduce debt levels.
Retailers in California — a market with more than 90 regional malls — are tightening the vise on Broadway. About 90 percent of Broadway’s business is in California, with just a few units in Arizona, Colorado and New Mexico.
“In a tough market, Broadway isn’t a compelling retailer,” said Steven Kernkraut, analyst with Bear Stearns. “Broadway’s shown some improvement, but Penney’s has improved big-time, Sears certainly is taking away market share, May’s a strong player, Mervyn’s seems finally to have stabilized and Bullock’s has gone to more moderate merchandise, closer to Broadway. These players dominate the broad middle market.”
“With Broadway’s 70 percent ownership by Zell/Chilmark and its number of good store locations, I’m sure they’re thinking about how to maximize value,” said a bond analyst, who requested anonymity. “They probably will have to sell some assets to continue the store renovation program and to keep liquidity strong.”
Broadway chief financial officer John Haeckel said no selloffs are planned to raise cash, though there could be one or two closings, as well as openings this year.
According to Dworkin — who, bearing the reputation of a turnaround specialist, took the helm at Broadway two years ago — a recovery “is not orderly.” “You can’t say, ‘OK, I’m just going to fix the people first. Then I’m going to fix the merchandise. Then I’m going to fix the stores.’ Unfortunately, you have to throw 30 things at the wall, knowing that maybe five are going to stick and 25 other things you’re going to get rid of.”
So far, he has streamlined the organization — half of the divisional merchandise managers and store managers have left since Dworkin took charge — and cut other costs to generate cash flow. He has also put the company on a more moderate and private label path, attempting to attract lower-income and minority audiences. The store has employees who study Latin culture and work to merchandise units in specific neighborhoods for the Latino market. In addition, the store creates separate radio and television commercials for Spanish language radio and televisions stations in specific markets.
Historically, the chain covered everything from bridge to moderate merchandise, had no strong direction and tried to have a broad appeal. Currently, they are chasing the moderate customer by shedding bridge and better lines and marginal lines and cutting vendor lists — dozens in some classifications, such as blouses. Dworkin’s emphasis on private label reflects his approach to fashion. He downplays the importance of any label or designer, and vendor names in Broadway’s stores aren’t given the prominence they get from other retailers.
In Dworkin’s view, the fashion itself rather than the labels is what matters most. C.C. Courtenay, the chain’s own label, is a growing presence in women’s, juniors and men’s. The ceo said Broadway’s in-house brand will become a “very significant” part of the company’s business.
Another challenge is to modernize the stores. Most of the retailer’s 83 units, operating under the names The Broadway, Emporium and Weinstock’s, are dim, cluttered and filled with antiquated fixtures, though renovations at high-profile units such as those in Beverly Center, Century City and Las Vegas have created brighter, fresher stores.
The Broadway in the Northridge Fashion Center was totally rebuilt after being wrecked by the January 1994 earthquake. Each level has an oval design, an airy ambience and large, helpful customer service desks, providing a alternative to competitors such as Bullock’s and Robinsons-May, which in many cases have more conventional layouts.
The Northridge rebuild was fueled by insurance money, and Dworkin said the chain is slowing its renovation schedule to test the results of work already completed. Plans originally called for spending $336 million for store renovations between 1994 and 1996.
In the meantime, sluggish sales and heavy interest payments have inhibited Broadway’s recovery.
Wall Street, showing impatience after the retailer reported weaker-than-expected December comp-store sales gains of 2.4 percent, sent the stock down to a 52-week low of 5 1/2 on Jan. 20. The stock closed at 6 1/4, up 1/4 on the New York Stock Exchange Monday. The stock was issued in a July 1993 public offering at $13.75 per share, following the company’s exit from bankruptcy in October 1992.
Rumors that Chicago-based Zell/Chilmark was displeased with Dworkin’s performance and was considering a successor were denied by David Schulte, general partner in Zell and a board member of Broadway. “We’re fully committed to the company, and we think Dworkin is the right ceo for the business,” Schulte said.
There has also been speculation that ballooning interest payments could sink the ship — speculation that Dworkin, who is generally calm and soft-spoken, angrily denied.
“We have a several-hundred-million-dollar line of credit on inventory that we have zero borrowings on — zero. I don’t know how much plainer I can make that to the world,” he said.
Dworkin admitted that sales growth has not been great, but he attributed that to elements beyond Broadway’s control, including interest rate upticks, Orange County’s bankruptcy, California’s slew of natural disasters in the last year and the peso’s devaluation, which has depressed cross-border shopping.
Dworkin, who developed turnaround skills while at Storehouse PLC’s London-based British Home Stores, noted the success of his program there became evident after two years.
“At Storehouse, we were going along, having our darkest days, but after we got into the 23rd month, the lights went on and we never looked back,” Dworkin recalled. “Those points in time are hard to predict, but you have to go through a very tough, chaotic time in the beginning. We’re resolved and positive now about what we’re doing.”
Analysts are more circumspect.
The biggest financial challenge facing Broadway this year, they said, is to make money despite the interest payments on its debt, which are expected to rise due to increasing interest rates and anticipated increases in borrowing.
“It’s plain that coming out of Chapter 11, Broadway was still in the recovery room,” said Edward Weller, an analyst at Robertson, Stephens & Co. “The problem now is that they’re making the right moves, but they haven’t shown up in their financial results.”
Wall Street is projecting Broadway will ink a net loss of between 40 and 70 cents per share for the year ended Jan. 28, compared with a loss of $2.30 per share a year ago — a substantial improvement, but a loss nonetheless. “Even though the numbers are disappointing,” said Thomas Friedberg, an analyst at Genesis Merchant Group, “the $115 million to $125 million in cash flow Broadway should hit for 1994 should be at least $40 million to $45 million above what their loan covenants require.”
Broadway has “plenty of access to cash,” Friedberg noted, through its $575 million receivables credit line and $225 million working capital credit facility.
However, analysts noted that if Broadway has to borrow more on its credit lines for merchandise or capital spending — as it is expected to this year — then its interest payments could continue to overwhelm its operating profits. (See related story.)
Many of those payments would climb with each uptick in interest rates, the most recent coming with the Federal Reserve’s action to boost short-term rates by 1/2 percent on Feb. 1. The Fed has raised rates seven times in the last year.
As a result, analysts give Dworkin high marks for boosting operating efficiencies and cash flows in 1994, but strongly question whether improvements on such a scale will be enough to eventually make Broadway profitable.
“I think management has done wonders in making up ground lost by its predecessors, but it’s not clear yet if a turnaround is doable,” said Weller. “If they don’t improve sales and profitability at some point this year, there will be a question as to whether they’ll survive.”
For the 39 weeks ended Oct. 30, Broadway posted earnings before interest and taxes [EBIT] of $22.2 million, against a year-ago loss of $21 million. However, those earnings were erased by interest expense of $71.5 million, up 12 percent from $63.8 million. The result: a net loss of $49.3 million, compared with the $78 million loss in the prior-year period.
The road to black ink appears difficult. Analysts said Broadway needs to spend more than the $336 million planned for store renovations between 1994 and 1996, which could increase borrowings and make profits more elusive.
Robert Buchanan at NatWest Securities said Dworkin and Sam Zell, Broadway’s chairman, “were unrealistic about the level of investment needed to turn around the business.”
“It’s the same problem Kmart is facing,” Buchanan said.
“Those stores look too much like bowling alleys to do much business in 1995,” he said. “I don’t want to say they’re deluding themselves, but why would a customer want to shop in a Broadway store when they could shop the modern world in a Robinsons?”
Buchanan estimated that Broadway “needs to spend about $50 per square foot” on renovations, or “about twice” the $336 million slated for 1994-1996. Apart from Northridge and a few other standout units, “many of the redone stores look like a coat of paint and wax were slapped on them,” he said.
“Great companies like May and Nordstrom keep pumping hundreds of millions of dollars into their stores every year, and they’re way out front,” he said. Broadway’s real estate generally is in “desirable malls,” Bear Stearn’s Kernkraut noted, “but they wind up being the fourth or fifth player in the market” due largely to the stores’ condition.
“Between interest, capital expenditures, trade payments and principal payments on debt issues, this company is in a very challenged debt situation,” added Richard Hastings, a credit analyst for Solo Credit Service Corp., a commercial credit reporting agency for the apparel business. Through the first nine months of fiscal ’94, Broadway’s long-term debt stood at $1.3 billion, 3.6 times as much as its shareholder’s equity of $365.5 million.
“Broadway has to find a significantly greater improvement in operating profits, which the California economy may not give them,” Hastings said.
Dworkin said he felt the company is on its way up and noted that sales in women’s apparel grew more than 10 percent in January. He said merchandising has improved with more timely deliveries of seasonal goods, which began around mid-December.
As Broadway attempts to fix its merchandising, other retailers could be angling to pounce on potential selloffs. Financial sources speculated that Broadway’s Southern California units could remain as the company’s base, leaving its northern California and Phoenix stores as primary candidates for the block.
Potential bidders, according to analysts, include May Department Stores, J.C. Penney, Sears, Roebuck and Dillard Department Stores.