Over the past two years, real estate developer A. Alfred Taubman has pumped $110 million into Woodward & Lothrop, funds the cash-hungry retailer has needed to meet hefty interest payments and renovate its stores.

The continued financial support of Taubman, who tried unsuccessfully to sell Woodies in 1988, has been an essential element in the retailer's ability to remain competitive, according to a new research report prepared by the New York investment firm Salomon Brothers.

"The financial success of Woodward & Lothrop Inc. is heavily influenced by the actions and support of TIC," Taubman Investment Co., the Salomon report said. "If TIC were to withdraw financial support or place the company up for sale, {Woodies} credit quality would deteriorate."

There is no indication that Taubman plans to sell the retailer or withdraw his support. Instead, his mammoth new investment in the company -- which owns the Woodward & Lothrop chain here and the John Wanamaker chain in Philadelphia -- generally was interpreted as a sign of his strong commitment as the owner.

"Woodies is in the middle of a substantial capital investment program that needs this kind of investment and warrants this spending," said Bernard Winograd, president of Detroit-based Taubman Investment Co. "We are looking to a handsome return on our investment from the operation of the stores in the future."

The Salomon report also revealed that over the past three years, Woodies's sales have been flat while its operating profits have been cut in half. Analysts said the operating profits have declined primarily because of discounting. Sales were $911 million for fiscal 1988, $900.5 million for 1989 and $913.4 million for fiscal 1990, while operating income was $36.3 million in 1988, $6 million in 1989 and $18.1 million in 1990.

Salomon Brothers estimated that the improvement in operating income from 1989 to 1990 will continue, reaching $23.7 million by 1992.

Woodies executives blamed the retailer's lackluster financial performance in recent years on renovations at some of its top-producing stores. Sales at the flagship John Wanamaker store in downtown Philadelphia, the chain's highest volume location, plummeted $35 million, from $100 million to $65 million last year, according to the Salomon report. In the Washington area, at least $10 million in sales was lost at the Woodies store in Landmark Mall, while an undisclosed amount was lost at the Tysons Corner location, both because of renovations.

Arnold H. Aronson, Woodies chairman and chief executive, confirmed the lost sales due to renovations and did not refute the accuracy of financial data in the Salomon report.

"We're in a period of tremendous reinvestment and spending a lot of money, but we are convinced that that reinvestment is going to pay off in the long run," Aronson said. "You have to spend money to make money, and we have confidence in the bet we are making. The Taubman Investment Corp. has made a major investment and commitment to the company and we are in a closely aligned partnership."

The Salomon report, for use by investors in Woodies's high-risk, high-yield junk bonds, offers a revealing glimpse into the inner workings of the privately held Washington company. Taubman purchased Woodies for $227 million in a leveraged buyout in 1984 and added the Wanamaker chain for $172 million in 1986.

After Taubman tried to sell the operation in mid-1988 after disappointing sales, he changed course and decided to start making the substantial investments. Of the $110 million he has invested in the company in the last two years, about $40 million has been used to buy back Woodies junk bonds, high-risk, high-yielding bonds, which were trading at depressed prices. The purchase of those bonds reduced the future interest that the company had to pay by about $6 million a year.

Aronson said the company would look for opportunities to buy back the approximately $89 million in remaining junk bonds outstanding. The bonds, which once dipped as low as 30 cents to 40 cents on the dollar, have been trading around 60 cents. At that price, the bonds yield about 30 percent, an indication that investors view the securities as extremely risky.

According to Salomon figures, without the massive infusion of cash, Woodies would not have been able to pay off hefty interest debts and modernize stores at the same time. That trade-off has been faced by a number of retailers in leveraged situations where cash flow is tight, and it has forced many to disregard needed store improvements.

"If we got in a situation where discretionary costs had to be cut, we could," said Woodies Vice Chairman Robert J. Mulligan. "But for now we find this kind of spending sustainable, and since we don't have to respond to shareholders and bottom line, as long as we try to generate cash to pay for the interest and capital expenditures, we are not under pressure."

In fiscal 1990 -- a year in which cash from operations was $51.2 million and Taubman invested $75 million in fresh capital -- Woodies spent $58 million on renovations and $53.9 million on cash interest payments.

Woodies executives pointed out that the retailer has been paying its bills on time and analysts are confident about its health.

"They are heading in all the right directions and now they have to hope that the consumer, who right now is not spending, will follow," said Walter Loeb of Loeb Associates. "But Woodies has a preeminent position and if Taubman keeps putting money in, it should pay off."