Sanford C. Sigoloff, the corporate Moses who is trying to lead Wickes Cos. Inc. back to the land of profits, chose a tough course for his company 10 months ago.
The $4 billion retail chain, headquartered here, was $2 billion in debt. Interest rates were rising. Creditor confidence in Wickes' ability to pay was falling. Suppliers were cutting the company off, creating a merchandise shortage that aggravated the shortage of customers and cash.
"We were going straight into dissolution," Sigoloff said. So, the Wickes chairman said he chose another path--escape through the brutal "valley of crisis management," a journey he hopes to complete by the end of this year.
Going through the valley means going through U.S. courts--asking protection from creditors under Chapter 11 of the federal Bankruptcy Act of 1978. Wickes filed its petition last April 24 and, thus, became the largest company to seek protection under the act.
The Wickes case is instructive as an example of the tribulations and triumphs of Chapter 11 companies and as a study of how they came to the valley in the first place. The case also provides some insights into other troubles those companies might face if Congress moves too slowly to revise what the Supreme Court says are unconstitutional portions of the current law.
Chapter 11 is designed to stay collection of prior debts until the debtor has had a chance to reform past costly behavior. Correction often involves shutting or selling unprofitable divisions, cutting or freezing salaries and benefits and firing workers and managers.
An estimated 14,696 U.S. companies filed under the code in the year ended June 30, 1982, compared with 7,814 Chapter 11 companies the previous year, according to the Administrative Office of the U.S. Courts.
Chapter 11 and other bankruptcy cases increased mostly because of the current recession, which is "three to eight times longer than the prior six recessions since World War II, and nine times as erratic", Sigoloff said. But he said American management--marked by a ruinous passion for the quick-fix and inflation-driven quarterly profits--was another big factor.
"Top managers in most of the country's businesses have grown up and have been successful in inflationary economies. But they haven't been trained to succeed in an economy where production costs outstrip prices that are held down by increased foreign competition, weak domestic markets and idle domestic plant capacity," Sigoloff said.
As a result, many companies find themselves in a weakened cash flow position, which they try to improve by borrowing and buying. "They panic," the Wickes chairman said.
"Conditions continue to worsen. Sales keep going down. Pretty soon, they're in a position where they don't have enough money to cover interest costs. From there, they slide into dissolution or go into the 'valley of crisis management,' " Sigoloff said.
Sigoloff has led Chapter 11 companies through the valley twice before, once as chief executive officer of Los Angeles-based Republic Corp. and again as president and chairman of Daylin Inc.
Both companies reached the land of profits. But several years after its salvation in 1976, former Los Angeles-based Daylin disappeared into the conglomerate embrace of New York-based W. R. Grace Co.
Wickes directors, impressed by that record, called Sigoloff to his present duties last March. There was no fiery bush at the anointment. But there were four high-level firings--called "resignations" in corporate jargon--as Sigoloff picked up the crosier of his new position.
"This is the first time I've had to bring in a whole new team" in an attempt to return a company to prosperity, Sigoloff said. "Most times, it's a matter of keeping the people already on hand and giving them the right instructions. But in the case of Wickes, we had early retirements, and we lost all of the people who wouldn't work seven days a week," he said.
Sigoloff immediately set up crisis teams, who worked long hours ferreting out problems, such as "bleeders"--divisions losing too much money too fast to stem the flow or replace the losses with more infusions of cash.
It was a matter of "identifying those problems posing immediate threats to our life and separating them from problems we could live with for a while," Sigoloff said.
The biggest difficulty stemmed from Wickes' 1980 purchase of Gamble-Skogmo Inc., a Minneapolis-based general merchandiser, according to Sigoloff and other Wickes managers. Wickes paid $136 million and swapped some stock to get G-S, and then sold $110 million worth of G-S properties to help support the purchase.
The strategy was to use as much of the G-S acquisition as possible to help boost Wickes' retail operations. But Wickes, already burdened with huge losses and debts, inherited another $794 million in short- and long-term obligations in its purchase of the Minneapolis company. That, coupled with subsequent "mistakes" in attempts to raise additional capital, proved to be Wickes' undoing, said Jeff Chanin, a former bankruptcy lawyer who is now Wickes' senior vice president for operations.
"The failure to use the acquisition properly was nothing more, nor less, than the failure to execute," Chanin said. "Prior management had what they viewed as an excellent vehicle for redirection in the G-S acquisition. But they failed to make the tough decisions needed to reduce the enormous debts they incurred. At the same time, interest rates were soaring," Chanin said.
Sigoloff and Chanin said "prior managements's failure" to take that look created "a panic situation" last February in which all of Wickes' assets were put on the block. The company's 44 major bankers, already nervous, were shocked by the move. Jittery suppliers stopped shipping "because no one knew how long the company would be around," Sigoloff said.
"None of that did anything to increase creditor or consumer confidence," Sigoloff said. And without the confidence of creditors, a financially distressed company is cut off from a critical source of sustenance, he said.
Regaining that confidence entailed cutting payrolls, from 40,000 Wickes employes worldwide at the time of Sigoloff's arrival last year to about 27,000 today. And it involved face-to-face meetings, such as those with managers of Chicago-based Aldens Inc., a G-S catalog sales subsidiary, to tell them they no longer had jobs.
"Aldens is a 96-year-old company. But it had developed a sales strategy which was unfortunate for our times. It was providing credit at 22 percent interest rates to the $15,000- to $25,000-a-year-income customer, the most likely person to be put on the street in a recession," Sigoloff said.
The decision to close Aldens was announced in December. It came "after four months of intensive review" during which Wickes' new managers concluded that the catalog business "could not survive," Sigoloff said.
Sigoloff's toughness--viewed as callousness by some--appeared to be turning the company around in the second quarter of 1982. Wickes then reported a net loss of $560,000 on sales of $742 million, compared with a first quarter loss of $156.4 million on sales of $652 million.
But the Aldens closure put Wickes back into the heavy loss column in the third quarter, the latest reporting period at this writing. Wickes reported 1982 third quarter net losses of $75.8 million on sales of $679 million, compared with a net income of $2.7 million on sales of $916.5 million in the same period in 1981.
There are solid indications of progress. The suppliers are shipping again, and customers are returning to the company's 3,000 remaining stores. Wickes also has launched a $25 million capital spending program, showing that it intends to move from a defensive to an aggressive posture.
"We still have a a lot more work to do," Sigoloff said. But he said that work has been made more difficult by Congress' failure to correct what the Supreme Court says is a major flaw in the 1978 bankruptcy law.
The court ruled June 28 that the law was unconstitutional because it does not give life tenure and other security of the federal judiciary to bankruptcy judges, who, nonetheless, have been exercising federal power.
Under Article III of the U.S. Constitution, that power is reserved for life-tenured judges, the court said. The court asked Congress to amend the law by Dec. 24, but the legislators adjourned for the year without taking action.
Sigoloff said the impasse comes at a bad time for Wickes. The company has made it to a point called "regenerate, repay and regrow," he said. It is "the crucial point" in the tortuous journey, the point at which a Chapter 11 company begins to master its problems and build for the future, he said.
"All of this comes down to the refusal of people in power, both in companies and in government, to look at the facts and make a decision," Sigoloff said. "We are going through an economic revolution in this country; we are seeing tremendous changes. But a lot of people in a position to do something don't seem to want to deal with it," he said.