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Ames Department Store Inc. (NASDAQ: AMES) 2418 Main Street, Rocky Hill 06067-
Ames Department Store Inc. (NASDAQ: AMES) 2418 Main Street, Rocky Hill 06067-
President and CEO: Joseph R. Ettore
Revenues (FYE Jan. 30, 1999): $2.5 billion
Earnings (FYE Jan. 30, 1999): $33.9 million
Employees: 38,000 (incl. Hills Stores Co.)
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Business New Haven
4/19/1999
By: BNH
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Looking back about a decade, Ames Department Stores Inc. had just purchased Zayre Stores - an acquisition that almost precipitated the demise of Ames itself. Recently Ames again ventured into acquisition mode with its purchase of the Hills Stores Co. for $330 million. Those who remember Ames' history may well wonder: Will this be a horse of a different color?
Joseph R. Ettore, Ames' president and CEO since 1994, can be candid about the Zayre deal since he was working for a competitor when it was consummated. He defines the ill-fated acquisition as a “terrible, terrible deal,” followed by “total, total mismanagement of a poor acquisition.”
Ettore explains that there were “no synergies between the companies” and that Ames attempted to integrate its own systems with that of Zayre. It was this “attempted integration that caused [the marriage] to fail,” he says. In 1990 Ames filed for protection under Chapter 11.
By contrast, in the case of the Hills' acquisition, Ames is not integrating anything of Hills' and is also aggressively eliminating duplication between the organizations. As a result, Hills' executive offices, upper management and other duplicate positions, such as buyers, were not folded into the Ames organization. However, Ames did retain nearly 95 percent of Hills Stores' employees, including store management.
Ettore treats Hills as strictly “a real estate deal.” Geographically, at least, it is a “perfect fit.” Demographically as well, Hills operates in a market that is identical to Ames', and the store sizes are appropriate.
The company will spend $185 million in a three-phase plan to convert the Hills locations into the Ames format. Fifty first-phase stores are already undergoing inventory liquidation, renovation and conversion with a grand opening date of April 22. Hills stores marked for second- and third-phase conversions have anticipated grand opening dates in July and September, respectively.
Ames is continuing to rely on its successful format to lure customers into its stores. The target customer is at the lower end of the middle-income level, with an annual income between $25,000 and $35,000. Unlike some competitors, Ames does not force customers to “buy up.” Ames negotiates with vendors to keep merchandise choices at the target level, even though these vendors may want to push a higher priced line of goods.
The Hills acquisition adds 153 stores to Ames' own 300 and brings total annual sales to about $4 billion. Ames has jockeyed into position as the largest regional discount retailer and fourth among the nationals behind Wal-Mart, K mart and Target.
The Hills deal increases Ames' market from 14 states (plus the District of Columbia) to 19 and enhances presence in other states like Indiana, Tennessee, Illinois and North Carolina. Even with this acquisition, Etorre says Ames' growth strategy remains unchanged. Plans continue for opening five to ten new stores each year. Ames will take over eight former Caldor stores (seven in Connecticut) as well as a Caldor distribution center. This $40 million dollar deal will increase Ames' store count in Connecticut to 22 from 15.
For the year ended January 30, Ames sales rose to $2.5 billion (including $112 million from Hills), representing a 12-percent increase from the year ended January 31, 1998. Excluding Hills' sales, Ames stores posted total net sales of $2.395 billion, which represents a seven percent increase from the prior year - much more impressive than the three-percent annual growth recorded from 1996-97 and from 1997-98.
Net income for the fiscal year was $33.9 million ($1.40 per share) compared to $34.5 million ($1.46 per share) for the prior fiscal year. Included in the most recent results was a $6.6 million loss from the Hills operations and $7.6 million for restructuring and other charges. Segregating performance of the Ames stores alone for the fiscal year, net income was $48.1 million ($1.99 per share), representing a 39-percent hike over the prior year.
But Ames hasn't reached the winner's circle yet. The company's balance sheet shows a negative working capital position: total assets of $1.483 billion and stockholders' equity of $324 million as of January 30. The Hills acquisition will strain cash flow for 1999 as the company converts Hills stores into Ames. Rolando De Aguiar, executive vice president as well as chief financial and administrative officer, explains that the company plans approximately $200 million in cash and capital expenditures for 1999. By year 2000, he predicts, Ames will be cash flow-positive.
For current cash needs, including the Hills acquisition, the company has arranged a new $650 million line of credit. All of the former Hills stores will have completed conversion into the Ames format by fourth quarter 1999.
The stock price has responded positively. Although trading at a 52 week low of 10 1/2 in September/October 1998 the price is now in the $35-$36 range, closing on April 2 at 35 5/16. Barring an economic slowdown - the bane of retailers - Ames' acquisition of Hills may yet be a winner.
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