MOODY'S LOWERS CONV. SR SUB. NOTES OF BROADWAY STORES, INC. (FORMERLY KNOWN AS CARTER HAWLEY HALE STORES, INC.) TO Ca
New York, 08-07-95 -- Moody's Investors Service lowered its rating on Broadway Stores, Inc.'s $144 million senior convertible subordinated debentures to Ca from Caa.
The downgrade was prompted by Broadway Stores' reduced financial flexibility; operating results that are likely to remain weak; and the company's inability to grow same store sales following a 1994 remodeling program. The rating also reflects the company's highly leveraged balance sheet, a continued weak retail U.S. environment in general and a soft Californian economy in particular; and increased competitive pressures in the company's markets. However, the rating recognizes the potential benefits of selling some non-core operations, a move which the company is now seriously considering. The rating outlook remains negative.
Broadway Stores, which emerged from Chapter 11 proceedings in 1992, continues to face the challenge of differentiating itself from its core competitors in a difficult U.S. retail environment. Last year, in an effort to boost sales, the company embarked on a niche strategy to address the broad ethnic diversiy of its markets. As part of this effort, it adjusted its price points to reflect its new target customer and introduced a larger private label program. The company also made efforts to improve its merchandise offerings. But despite these actions, Broadway Stores has been unable to attract enough customers to generate the cash flow it needs to fund its store remodeling program and to reduce its heavy debt burden. For the year-to-date period, sales at stores open for one year, have declined 4%.
The company recorded an operating loss of $12.2 million for the first quarter ended April 29, 1995, due to weak sales at existing stores and higher markdowns needed to clear inventories as well as higher SG&A expenses. (Inventories actually rose to $435 million from $405 million over the first quarter of 1994, reflecting partially the company's purchase of its shoe business and inventory for four stores newly reopened.) Moody's expects the company to show further operating losses as sales remain weak and inventory levels high.
As a result of these operating losses, Moody's expects a further deterioration in the company's debt protection measurements. For the 12 month period ended January 28, 1995, interest coverage was .85 times, while lease adjusted leverage was 80%. On a cash flow basis, leverage exceeded 13.2 times. Although the company earlier this year decided to scale back its store remodeling program, the need to fund operating losses will result in increased debt, further weakening protection for bondholders. At the end of the first quarter, the company had less than $84 million available under its $800 million bank credit facilities. As all of the Broadway Stores' assets are pledged to its secured lenders, Moody's expects little recovery for bondholders if the company is unable to improve its financial performance. In June, Broadway Stores obtained an amendment from its working capital banks providing it with more flexibility to meet certain financial performance tests.
Broadway Stores, which also operates 12 stores outside of its core California markets, has indicated its willingness to consider selling non strategic assets. While proceeds from such a sale would increase the company's financial flexibility in the short run, they would do little to relieve Moody's concerns about the company's long term viability because the company faces increasing competitive pressures from larger and better capitalized national retailers which are encroaching upon its market. The company's non-California stores had sales of $258 million for 1994 on total company sales of $2 billion. The company's decision to scale back its store remodeling program (it now plans to spend approximately $40 million as compared to $110 million the previous year), while financially prudent in the short term, will put the company at a further disadvantage as two-thirds of its long-neglected stores still have not been overhauled. The company has indicated it will rather focus on smaller scale interior remodelings.
Broadway Stores, Inc. operates 83 department stores in the Western US under the names The Broadway, Emporium and Weinstocks. The company is based in Los Angeles, CA.
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