JOHN DeMONT December 4 1989



JOHN DeMONT December 4 1989




The contrast was startling. Last week, as United States retailers kicked off their critical Christmas sales season, shoppers crowded into the giant R. H. Macy & Co. department store in downtown Manhattan, where they jostled to get first chance at the perfumes and fashions on the store’s block-long first floor. Only two blocks away, at the glittering two-month-old Abraham & Straus (A&S) department store, owned by Canadian entrepreneur Robert Campeau, Christmas merchandise was on display amid glittering holiday decorations, but throughout the spectacular six-floor store, the crowds were far thinner than at its rival, Macy’s. Yet even if crowds of shoppers send Christmas sales soaring at A&S, Campeau’s debt-plagued empire approaches the end of the year perched perilously on the edge of collapse.

Although the company still carries his name, the volatile Sudbury, Ont.-born French-Canadian with the famous Cheshire-cat grin has little control of the future of Campeau Corp., the retail and real estate conglomerate he started 40 years ago. In September, after days of battling to find a solution, Campeau effectively surrendered control of his deeply troubled company in return for a $300-million rescue loan from Toronto’s billionaire Reichmann family. Campeau Corp.’s new four-man management committee, which excludes its flamboyant founder, is now wrestling with a crippling and growing $ 13-billion debt that Campeau ran up buying two of North America’s biggest department-store conglomerates—Allied Stores Corp. in 1986 and Federated Department Stores Inc. in 1988.

And last week, amid mounting speculation that North American retail sales would remain flat or barely climb above inflation during the festive season, Campeau’s trou-

bles deepened. For one thing, his Californiabased supermarket chain, Ralphs Grocery Co., reported a $29.8-million loss for the nine months ending Oct. 8. For another, shares in Campeau Corp. remained mired at $4.85 last Friday, compared to the 12-month high of $22 per share in September.

Campeau Corp. is now trying to reschedule looming loan payments and to sell off some of

the Campeau empire’s most prized assets, including the glitzy Bloomingdale’s department-store chain, part of the Federated group. But even that may not be enough to restore the shaken confidence of Campeau investors and suppliers, many of whom only reluctantly agreed to stock Allied and Federated shelves with Christmas goods. Said Harry Rannala, an

analyst with Toronto investment house McLean McCarthy Ltd.: “This company has a rocky road ahead of it.” Despite the trouble, last week, in the dramatic glass, steel and mirrored atrium that Campeau built for A&S to anchor its surrounding stateof-the-art shopping centre, workers were busy assembling a gold-and-red velvet stage for a planned appearance by a Christmas band. As they did, the store’s four seethrough elevators—not often crowded—moved silently from floor to floor. And on some of the atrium’s floors, there were more empty storefronts than rented ones, suggesting that Campeau may be having a hard time finding tenants for the Christmas season.

As business was slowly picking up at A&S, the scene

was very different at Bloomingdale’s, Campeau’s top-of-the-line store, where the crowds of Christmas shoppers were just as thick as those at Macy’s. Said Kurt Barnard, editor of the influential Barnard’s Retail Marketing Report: “The Bloomingdale’s store in Manhattan is another story altogether. They have been very promotional, with a lot of things on sale. But they have planned their sales program very carefully so that the profit margins will remain high.”

And as the busy U.S. Christmas buying season began, Campeau seemed to have weathered its most immediate and potentially crippling crisis. The company’s acute cash shortage had raised concerns that Allied and Federated stores would be unable to keep their shelves stocked with merchandise during the critical Christmas period, when U.S. retailers make more than half of their annual sales. But last week, even though it appeared to have fewer customers than Macy’s, the A&S flagship appeared well supplied, as did nearby Bloomingdale’s. And the company was confident enough about its ability to maintain inventories that it dropped plans to offer letters of credit to merchandise suppliers. Said Allied and Federated spokesperson Carol Sanger: “We are getting almost all the merchandise we need in our stores, so that the plan for the letters of credit is not needed.”

Even so, the mood of Campeau’s suppliers remains highly guarded. Some clothing manu-

facturers said they are concerned that they may not be paid for goods shipped in future to Allied and Federated stores. Although suppliers have advanced orders for goods to Campeau’s stores, Richard Posner, executive '/icepresident for Credit Exchange Inc., a New York-based credit service, said, “There is a hesitancy among some suppliers to do business with Allied and Federated.”

Other retailers are experiencing an uncertain Christmas as well. Regional chains such as Virginia’s Miller & Rhoads Inc. and Atlantabased L. J. Hooker Corp Inc.’s B. Altman & Co. and Bonwit Teller divisions have been forced into bankruptcy filings because they have been unable to service their large debts. And a number of other U.S. chains, including swanky Saks Fifth Avenue and venerable Marshall Field & Co., have either been sold or are on the auction block.

And there is a growing concern among suppliers that a widely predicted economic downturn could dampen U.S. consumer confidence and spending, -holding 1989 sales close to 1988 levels. Even if sales do climb, they are expected to rise just slightly above the inflation rate. Janet Mangano, head of research at New York investment house Josephthal & Co. Inc., predicted that retail sales in the United States will climb 4.7 per cent—or just about one per cent in real terms, given the 3.5-per-cent rate of inflation in the retail industry—to $1.96 trillion for

1989, compared with a rise of six per cent in 1988 before inflation.

The outlook in Canada is also clouded. The Retail Council of Canada forecasts that sales will jump by seven per cent this year. But, in real terms, that is only a two-per-cent increase when the inflation rate of about five per cent is accounted for. Gross revenues will be more than $100 billion, compared with $93.7 billion in 1988. Canadian retailers are deeply pessimistic for the short and long term. A survey released by Toronto-based management consultants Touche Ross & Co. on Nov. 9 found that 39 per cent of retailers expect economic conditions to worsen in 1989, compared with 15 per cent who felt that way in a 1988 sampling. And only eight per cent predict that the economy will strengthen, down from 39 per cent of Canadian retailers who expressed such optimism in a similar poll last year.

But even in the sluggish North American market, Campeau’s sales are not expected to do better than any of its competitors. And analysts say that, clearly, Campeau Corp., which faces interest payments totalling $930 million a year, cannot afford a poor performance. As well, Campeau’s new management team will have to find a way to reschedule two large payments on its debt that come due early in 1990.

Allied has a $410-million loan due on March 15,

1990, and Federated has another $936-million loan due on April 30, 1990.

As well, a slow Christmas season could also prove difficult for Campeau’s financial supporters. The Reichmann family, which lent Campeau $300 million Hast September, may again have to provide aid. Their real estate company, Olympia & York Developments Ltd., has agreed to help in the refinancing of the $936-million loan owed to a syndicate of banks led by Citibank NA of New York. The Reichmanns have also agreed to lend additional money for longer-term financing.

But the Reichmanns’ assistance is conditional on Campeau selling Federated’s 17store Bloomingdale’s chain. A number of potential buyers appear to be interested, including Japan’s $2.7-billion Tokyu Department Store Co. Ltd.—which has department stores in Hong Kong, Singapore and Hawaii— and Bloomingdale’s chairman Marvin Traub,

who may be putting together his own offer.

As well, early in 1990, the company has to buy back 75 per cent of the high-risk, high-yield junk bonds that Campeau used to finance part of his U.S. acquisitions. Junk-bond holders have seen the value of their securities dropped to less than half of their original value. At current depressed prices, Campeau’s buy-back plan would cost only $1.64 billion for securities, which were worth $3.8 billion when issued. Whether junk-bond holders will agree to tender their bonds at much lower prices remains to be seen.

However, even if junk-bond holders agree to

sell their bonds, analysts predict that Campeau will likely have to sell off even more of its U.S. retail chains, at a time of flat retail sales, in order to bring its debt down to manageable levels. Concluded analyst Rannala: “It is critical that Campeau management convince investors and suppliers that their company is financially sound.” That job was made harder last week when Campeau announced the Ralphs Grocery loss of $29.8 million. Still, management at the supermarket chain say that they still intend to open 15 more stores in 1990.

Shareholders have been selling off Campeau stock ever since the company’s problems came to a head in September. After hitting a record close for the year of $22 on Sept. 7, Campeau shares nose-dived to close at a low of $4.80 on Nov. 15 as many U.S. investors sold their shares so that they could declare their losses for tax purposes in 1989. Another sign of declining investor confidence is the growth in stock-market bets that Campeau’s trou-

bles will continue. The number of shares borrowed by speculators from brokerages with the intention of buying them back at a lower price has been climbing—the Toronto Stock Exchange reported that, on Nov. 15, 442,357 Campeau shares had been sold short, compared with 389,469 just two weeks earlier, the latest dates for which figures are available. Clearly, unless big crowds arrive at A&S and the rest of Campeau’s stores, investors will no doubt push Campeau Corp. stock down further and the firm closer to the edge.