THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, August 20, 1995 TAG: 9508190078
SECTION: BUSINESS PAGE: D2 EDITION: FINAL
SOURCE: BY STEPHANIE STOUGHTON, STAFF WRITER
DATELINE: VIRGINIA BEACH LENGTH: Long : 212 lines
Frank Doczi's baby - HQ Home Quarters Warehouse - burst onto the home-improvement scene almost a decade ago. With mammoth retail outlets and an aggressive ``we can't be beat'' pitch, it eclipsed even giant Lowe's.
So, what's the problem?
While Doczi's HQ is considered a formidable competitor, its parent company is not. Landover, Md.-based Hechinger Co., which owns both HQ and an older home improvement chain operating under the Hechinger name, is struggling.
Hechinger's message to Doczi, HQ's chief executive officer and president, has always been: give us growth and profits. And for years, HQ has delivered. But the company's performance has begun to wane.
In the second quarter ended July 29, Virginia Beach-based HQ had its worst showing since it was acquired by Hechinger Co. seven years ago. The first quarter of 1995 wasn't much better.
Facing stronger competition, the company retreated from its Carolina markets. It also scaled back estimated store openings for 1996, saying the company needed to concentrate on its existing markets.
Despite these problems, company executives say criticism is premature. HQ has delivered explosive sales for years, as well as the new, highly successful ``Chesapeake-class'' warehouses, the gargantuan home improvement centers.
``First of all, the financial community is, and maybe has to be, short-term oriented,'' said Clark McClelland, chief financial officer of Hechinger Co. ``It's a bumpy road at times, but we have the right stores, and we'll do fine.''
HQ's weak performance might be a surprise, but its parent company's woes are no secret.
Hechinger Co.'s earnings have slumped. It lost $9.9 million last year due to a huge tax charge for store closings. By contrast, it garnered a $24.8 million profit in 1993.
Many of the company's Hechinger division stores for years languished in the shadow of Home Depot Inc. and Lowe's Companies Inc. The 64-store chain has been paring its work force, and in the process, has been pummeled by discrimination lawsuits.
On Wall Street, investors have noticed. Hechinger Co.'s stock fell to 6 3/4 late Friday afternoon, down from a 52-week high of 15 3/4 on Sept. 7.
The company's sagging performance led Moody's Investor Service last month to lower the parent company's senior debt rating below investment grade. Moody's said Hechinger Co. is vulnerable because its competitors, which cover more area and have deeper pockets, have seized market share from the Maryland company.
Moody's predicted more problems with the hazy economic outlook for three of Hechinger's markets: Hampton Roads, Northern Virginia and Maryland.
While Hechinger division stores might be expected to have slower growth, HQ outlets were supposed to be booming. But recently, HQ has begun to lag behind its aging sibling.
``I don't quite understand it,'' said Neal Kaplan, a retail analyst with Scott & Stringfellow in Richmond. ``I was a strong supporter of HQ for a long time, but I kept getting disappointed. I look at their stores and the competition's stores, and I don't think Home Depot was much better than HQ.''
In the first half of the year, HQ's sales dropped 6 percent to $657.8 million and its operating income plummeted 34 percent to $25.2 million. Meanwhile, same-store-sales - revenue at stores open at least a year - continued to drop. They plunged 10 percent in April, 12 percent in May, 10 percent in June and then 13 percent in July.
North Wilkesboro, N.C.-based Lowe's and even the Hechinger division outperformed HQ in same-store sales for those months.
At Hechinger Co.'s annual meeting in June, Chief Executive John Hechinger Jr. acknowledged that sales ``fell off a cliff in April and May,'' the Baltimore Sun reported. On Wednesday, he blamed the company's slumping performance on unseasonable spring weather, a decline in existing home sales, lower lumber prices and competition.
Hechinger officials say HQ's problems are temporary. They say that while many analysts are looking only at the short-term, executives are more concerned with the company's long-term performance.
``I don't think anybody is saying HQ is down for the count,'' said McClelland, Hechinger's chief financial officer.
But some industry observers have watched HQ's latest moves with dismay. They wonder why HQ abandoned its markets in the Carolinas. And others question whether its parent company has enough capital to accelerate growth of the ``Chesapeake-class'' HQ superstores, named after the new type of warehouse that first opened in Chesapeake's Greenbrier community.
Last year, instead of beefing up its stores in the Carolinas, HQ ceded to Lowe's and Home Depot.
``At the time, the decision seemed rational,'' Kaplan said. ``But there's a problem with that.
``The reason their stores were the oldest and smallest was because they were the first in the market with warehouse stores,'' he said. ``They basically lost their position. And it makes you wonder whether that will happen in other areas.''
HQ's Doczi says the company had good reason to close 13 stores in the Carolinas: the outlets were too old and small to compete with Home Depot and Lowe's.
The average Carolina store was 87,000 square feet - much smaller than the new, 110,000-square-foot HQ superstores. Plus, the markets could not support three giant home-improvement chains, he said.
In addition to closing older stores, Hechinger Co. plans to slow expansion of HQ in 1996, saying the company needs to strengthen its core markets. Hechinger tentatively planned to open 10 HQ stores, analyst Kenneth M. Gassman Jr. wrote in a Davenport & Co. weekly research report. It now appears that number had been whittled down to six, the report said.
Hechinger's ability to raise capital isn't an issue, said McClelland, the company's chief financial officer. Instead, executives decided to close stores and slow expansion because they wanted to shift HQ's focus.
``Any time you grow something fast you make a mistake,'' McClelland said. ``We made a conscious decision for 1996 that we did not want to go into new markets; we wanted to concentrate on existing markets.''
That task will go to Frank Doczi, HQ's chief executive officer and president.
While Hechinger's chief executive officer might have the last say, Doczi had the first. The self-proclaimed workaholic built HQ Home Quarters Warehouse from scratch.
Doczi agreed to build the company for W.R. Grace & Co. in 1984. But two years later, W.R. Grace announced it was considering selling the retail portion of its business, which by then included Doczi's six home-improvement warehouses in Hampton Roads.
Doczi and other HQ executives raised cash and purchased the six home centers. In an ideal world, Doczi might have kept the company. But it didn't happen that way.
With little capital for expansion, HQ began to raise money from investors. Then came Oct. 19, 1987, the stock market crash. Federal regulators announced a 90-day moratorium on any new public offerings.
Hechinger Co. moved in for a takeover. By 1988, it had bought HQ.
For Hechinger, it was a great deal. The company would finally have a new growth vehicle. In return, Doczi got this promise: Hechinger would give him freedom to run HQ, which would be aggressively expanded over the years.
Indeed, both sides kept their promises. HQ's sales soared as it grew to 50 warehouses, including the new Chesapeake-styled superstore that includes a play area for children and a host of services for shoppers. Hechinger, meantime, continued to fund that growth.
It's not clear which factor has contributed the most to HQ's recent slide: overall economic conditions, the industry itself or competition.
If it's competition, HQ could have new challenges as Lowe's and Home Depot up the ante.
Until recently, Lowe's has languished in HQ's shadow in Hampton Roads and several other markets. HQ simply overpowered Lowe's with more services and bigger outlets. In comparison, Lowe's stores looked worn and cramped.
``I think five years ago, the HQ stores were second only in the nation to Home Depot among large warehouse-type retailers,'' said Robert Strickland, chairman of Lowe's.
He doesn't think that way anymore.
While HQ still holds the No. 1 ranking in its home territory, Lowe's is knocking at the door with its own prototype warehouses. Last year, Lowe's opened three giant outlets in Chesapeake, Newport News and Virginia Beach - right down the road from HQ superstores. It also moved into the Richmond market.
The debut advertisements were fierce. Lowe's, which had petered out in this market, came back with an attitude.
It was, ``let's attack the king of the hill, so to speak,'' Doczi said.
Lowe's Chairman Robert Strickland says ego had nothing to do with his aggressive move back to Hampton Roads. He said Lowe's is simply replacing aging stores in this market and others like Richmond and Roanoke.
``We've been in Virginia before HQ was here,'' Strickland said. ``It was HQ that decided to exit the Carolinas in a three-way fight.''
Lowe's stores are giving HQ a hard time in several markets, including Hampton Roads, said analyst Kenneth Gassman of Davenport & Co. Neither company would provide market-share information for specific regions, but HQ said it has not lost market share in Hampton Roads.
Both Lowe's and HQ posted increases in market share in the area, according to preliminary figures from the 1995 Hampton Roads Opinion Surveys, published by The Virginian-Pilot and The Ledger-Star. Some of that is likely related to Builders Square's departure from Chesapeake.
The figures do not reflect the full impact of Lowe's new superstores here, since they had been open only a short time when the survey was conducted.
``I like Lowe's better than HQ,'' said April Bennett of Chesapeake as she took her child out a car seat in the parking lot of the Lowe's in Chesapeake. ``It's more attractive inside and the people seem friendlier.''
But some shoppers may be returning to the hometown chain after testing Lowe's.
``I've been to Lowe's, and I like HQ better,'' said Randy Tysinger, a postal worker from Chesapeake who was heading for HQ's Greenbrier store. ``I think it's geared more toward the customer.''
``HQ is flat out cheaper,'' said Paul Myler, a Navy operations specialist shopping at HQ. ``I tell you as an example: I checked HQ and Lowe's for fencing. HQ was $6 cheaper for a roll of fencing and $5 cheaper for gate.''
``I've always been coming here,'' Myler said. ``I've looked at Lowe's, but I came back.''
It's possible that HQ and Lowe's may both hold their own. Strickland said his company, Lowe's, and other ``elephants'' of the industry could be gaining market share from smaller home-improvement stores and lumber yards.
``We may be taking market share from the chickens,'' he said.
This battle over market share will grow even more cutthroat if Home Depot decides to open superstores in Hampton Roads. Real estate sources say Atlanta-based Home Depot has scanned the area but has not actively sought sites.
``I think they're getting closer,'' a local real estate source said. ``They don't seem to care about the competition.''
But some people in the industry think the opposite.
``I think they all recognize that a three-way fight gets really nasty,'' analyst Kaplan said. ``And I don't think anyone wins.''
It's unclear what the future holds for HQ. Some analysts think HQ might be better off without Hechinger.
HQ's Frank Doczi disagrees.
``We've never been held back as an operating company because of the Hechinger corporate parent,'' Doczi said. ``I see no great benefits to being separate.''
Still, Doczi might sometimes rue the day the stock market plummeted in 1987. It was that one day that prevented him from running the entire show.
``Frank is enthusiastic and knows his business,'' said Kaplan. ``As to how much authority he has - whether he controls the expansion - I suspect he doesn't have as much control as he'd like.'' ILLUSTRATION: Graphic
JOHN EARLE/Staff
A LOOK AT THREE HOME-IMPROVEMENT COMPANIES
SOURCE: Hechinger Co.
[For complete graphic, please see microfilm]
by CNB