Heilig-Meyers/Rhodes Merger
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Heilig-Meyers/Rhodes Merger
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(FOOL CONFERENCE CALL SYNOPSIS)* By Christopher McKay (MF Murdoch)
HEILIG-MEYERS CO. ALEXANDRIA, Va., Sept. 18, 1996/FOOLWIRE/ --- HEILIG-MEYERS CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %> held a press conference this morning to report its second quarter results, to discuss its acquisition of SELF SERVICE FURNITURE CO., and to announce its merger with RHODES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RHD)") else Response.Write("(NYSE: RHD)") end if %>. Heilig-Meyers is a home furniture and appliance retailer which, before today's news, operated 750 stores. The stores are concentrated in towns with populations of less than 50,000 which are more than 25 miles from major cities. It's competitors are largely mom-and-pop operations and the company uses its superior buying power to offer better selection and lower prices.
SECOND QUARTER RESULTS
The director of investor relations, Barry Brockwell, indicated that though sales results were a little bit below expectations, there were some positive underlying trends in the income statement, particularly in margins and cost control. Looking back at the fourth quarter, the company had earnings per share (EPS) of $0.06 on sales which were down 3.8% from the year ago period. This quarter, the company earned $0.16 a share on sales which were 3.4% below year ago levels, indicating discipline in cost control which should continue to have positive effects as sales performance improves.
Sales increased 6.2% from the first quarter, to $286.9 million. Other income declined six basis points to 19.7% of sales from the first quarter. The reason for the decline is the additional cost associated with a larger securitized receivable pool -- the company has an additional $150 million off-balance sheet compared to the year ago period. Gross margins were relatively flat compared to the year ago period -- the company is focusing on improving raw selling margins.
Selling, general and administrative (S,G & A) expenses increased 60 basis points (100 basis points = 1 percentage point) to 38.7% of sales over the year ago period. Salaries and related costs and advertising, which are the two primary components of S,G & A, were on target for the quarter,however. Advertising expense showed improvement as a percentage of sales, and the company continues to employ a more disciplined promotional strategy compared to prior years. Salaries and related costs came in slightly below budget in terms of total dollars, but lost some ground as a percentage of sales. This was the primary reason for the 60 basis point degradation in S,G & A.
Interest expense declined slightly to 3.8% of sales, down from 3.9% in the year ago period. The slight improvement is consistent with the trend in "other income" discussed previously -- the cost associated with securitized pools of accounts receivable is netted against finance and other income, and results in an almost one-to-one reduction in interest expense.
The weighted average short-term borrowings were approximately $207 million at a weighted average rate of 5.88%. The company's long-term borrowing were approximately $402 million dollars at a weighted average of 7.85. The company's current debt portfolio is approximately 95% fixed, up from 75%. The company issued $200 million of 7-year bonds at a coupon rate of 7.78% in August, which is the reason for the increase of the fixed portion of the portfolio.
Provisions for doubtful accounts held constant at 6.3%. While at a higher rate in the first and second quarters of this year than previously, delinquencies have stabilized. If this stability continues there should be some improvement in the provision in the latter half of the fiscal year.
The company added sixteen stores during the quarter, five through acquisitions, ten through the leasing of new space and one which was a prototype store.
OUTLOOK FOR THE SECOND HALF OF THE YEAR
The company has made substantial progress in four key areas: 1) Expense Control, 2) Margin Improvement, 3) Stabilization of Credit, 4) Sales improvement.
Troy Peery, President and COO, feels it is remarkable that the company has been able to maintain comparable same store sales in the current environment. He feels that once the credit situation starts trending in the right direction, the company will be able to get aggressive about sales improvement again. The company feels that improvement in that area is just around the corner, even thought the outlook for the sales environment hasn't changed -- the company still feels it is going to be a tough fall selling season. September sales are going to be tough, and a robust sales gain should not be expected. Last September, delinquencies increased sharply and the company is taking steps to ensure that this doesn't happen again.
SELF SERVICE FURNITURE CO. ACQUISTION
This was described as a typical Heilig-Meyers acquisition. Self Service, headquartered in Spokane, Washington, operates 23 stores with small-town locations. The acquisition fits in very well with the company's West Coast operations, and extends its presence up the coast from California into Oregon, Washington, Montana and Idaho.
Self Service is a well-run furniture chain which averages about $1.8 million in sales per location. The locations are good and average about 28,000 square feet, which is a little bit larger than the average Heilig-Meyers store, but they do use central distribution, instead having a warehouse in each store. Self Service uses third-party credit and sells only furniture. Heilig-Meyers will add value to the chain by improving distribution, burgeoning third-party credit, and by adding electronics and jewelry to the sales lines. The company has been looking to do the deal for over a year, and as the price approached book value, it decided to complete the transaction.
RHODES INC. MERGER
Rhodes is a specialty furniture retailer with 106 stores in 15 states. Under the terms of the merger, two Rhodes shares will be exchanged for one Heilig-Meyers share. This will involve the issuance of approximately four and a half additional shares of new Heilig-Meyers equity, which represents approximately 8% of the shares outstanding. The company will assume approximately $107 million of Rhodes's debt, which will be refinanced at significantly lower yields. The structure of the deal does not materially change the company's capitalization structure or the historic coverage ratios.
Rhodes will become a division of Heilig-Meyers -- its chairman and CEO will report directly to their equivalents at Heilig-Meyers. The people at Rhodes will continue to concentrate on running Rhodes and those at Heilig-Meyers will continue to concentrate on running Heilig-Meyers. Though it is a big acquisition, it will be minimally disruptive to either company's operations.
Mr. Peery indicated that the two companies have worked together previously, with Heilig-Meyers buying some Rhodes stores in smaller markets some years ago. These stores have been wonderful acquisitions, and stars within the system. Rhodes has also purchased some stores from Heilig-Meyers, and these stores are also performing very well. Mr. Perry said this "indicates very clearly the fit that Rhodes brings to Heilig-Meyers. There are many different things about Rhodes and Heilig-Meyers, but there are an awful lot of similarities as well."
Rhodes's stores are located primarily in mid-sized metropolitan markets and the company targets middle-income, credit-oriented customers. The average store size is 34,000 square feet and approximately 73% of its sales are made under third-party revolving credit arrangements.
The two companies target the same customers, but go about it in a different way, in different markets -- Rhodes concentrates on the middle markets and up, while Heilig-Meyers concentrates on the middle and down. Both cover a broad base of customers, with Rhodes' average price-point being slightly higher due primarily to its major-market locations. The company believes that there are tremendous synergies inherent in the deal. Mr. Peery indicated that the merger will be accretive to Heilig-Meyers without taking into account cost savings.
The new company will be by far the largest furniture company in the U.S, giving it tremendous buying power. While there is an 80% vendor overlap between the companies, the products that the two buy are somewhat different. For instance, Heilig-Meyers buys more $499 and $599 sofas, while Rhodes buys more of the $799 and $899 sofas. The new company will be able to impact all purchasing price points in a positive way.
The companies operate stores in the same geographic area, concentrating in the Southeast and Southwest. The company feels that the merger will provide excellent opportunities for Rhodes to bring Heilig-Meyers some expertise in operating in the larger markets -- Heilig-Meyers currently operates about 85 stores, or 12% of its total, in the larger markets. There will also be opportunities to switch store formats and use the Rhodes name for some stores in the larger markets, and vice-versa.
Rhodes has tremendous expertise in the use of revolving credit -- Mr. Peery described his company as a "neophyte" that stood to benefit from Rhodes' experience. Heilig-Meyers in turn will bring Rhodes a profit center that it is not currently taking advantage of -- credit financing. There will an opportunity for Rhodes, like Heilig-Meyers, to derive a third of its income from credit.
Rhodes has state-of-the-art operations systems for its larger volume stores, which average about $4 million in sales. Heilig-Meyers's systems are optimized for use in lower volume stores, typically $1.6 million in sales, and become inefficient as volume rises. The company can therefore learn much from Rhodes' systems. The new company will have tremendous advantages in distribution -- both Rhodes and Heilig-Meyers use central distribution systems and consolidation will greatly reduce costs. Overhead reductions will also occur in such areas back-office accounting functions.
All stores will be examined shortly, and it will determined if any need to be closed. Both companies have suffered recently in a tough economy but Mr. Peery said he believes that this is a cycle that is coming to an end, if not in this quarter, then at the beginning of the next.
The merger is expected to move along fairly quickly after shareholder and regulatory approval, and should be complete by late November or early December. Nothing about the deal will change in the meantime. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |