Hechinger Co.'s finances have deteriorated so rapidly over the last year that the home-improvement retailer is considering a bankruptcy reorganization filing, the company said yesterday.
Bankruptcy "is a possibility," company spokesman Sean Flynn said yesterday. "I can't say what level of possibility. Certainly, it's under consideration, as are other possibilities."
Founded in 1911, Hechinger opened its first store in the District in 1919. The family-owned business grew into a local institution and the first serious home-improvement chain in the nation. On weekends, many local do-it-yourselfers trekked to Hechinger stores carrying broken appliance parts.
But the Largo-based retailer is now hemorrhaging money and losing shoppers at a time when it should be reaping sales. The residential real estate market is booming, and consumers are reaching into their pocketbooks to fix up their homes. But over the past few months, Hechinger's future in the competitive do-it-yourself industry has grown more bleak.
"I think the likelihood of a Chapter 11 [bankruptcy] filing is very high," said Jerry Hirschberg of the New York debt-rating service Standard & Poor's Corp. Hirschberg noted that the company is battling mounting losses and debt.
The company failed to make a $4.7 million interest payment on its unsecured debt that was due May 15. And last week Hechinger reported a loss of $228.4 million in its fiscal second quarter, ended April 3, compared with a loss of $40.4 million for the same period last year.
Nervous suppliers are cutting back on credit, which has only intensified Hechinger's cash crunch, analysts said. The retailer is clearly having trouble stocking store shelves during the warm months when homeowners are most eager to spend money for house and garden improvement projects.
As items including electric hedge trimmers and garden hoses have been increasingly difficult to find at Hechinger stores, gardeners and do-it-yourselfers have turned to the company's competitors.
"The [Hechinger] stores are generally devoid of customers and devoid of employees when I go there," said Kenneth M. Gassman Jr., an analyst with Davenport & Co. in Richmond.
By the early 1990s, it was clear that the Hechinger family had failed to recognize the emerging threat posed by Home Depot Inc. and Lowe's Cos., which were beginning to dot the countryside with superstores. And when both rivals entered Hechinger's markets, including the Washington area, the company lost valuable market share and never managed to win it back.
Hechinger was sold two years ago for $507 million to Leonard Green & Partners, a Los Angeles investment group that combined the retailer with another ailing firm, Kmart Corp.'s Builders Square division.
Although Kmart sold Builders Square in 1997, it retained liability for the payments on the division's store leases. That means the Troy, Mich., discounter could be on the hook for more than $700 million in leases if Hechinger were to crumble.
"As you might expect, and certainly from time to time, people at Kmart have meaningful conversations" with Hechinger management, said Bob Burton, Kmart's vice president for investor relations.
Hechinger has acknowledged that a bankruptcy reorganization filing is among several restructuring options it will consider. The retailer, however, did not specify the alternatives.
"While there aren't specifics in what [management] will do, obviously [the] focus will be to continue to operate in the home center industry," company spokesman Flynn said. "The company has a solid core operating base," Flynn added. Hechinger operates 206 stores, including 60 stores that bear the Hechinger name, 90 Builders Square stores and 56 HQ-Home Quarters Warehouse outlets.
For the short term, Hechinger executives are focusing on solving staffing and merchandise shortages, he said. They also are negotiating with suppliers to try to solve "liquidity issues," he said.
In addition to its financial problems, the company also is dealing with changes in top-level management, Flynn said. Hechinger's chief executive, Mark Schwartz, resigned in March.
Industry analysts said it will be difficult for Hechinger officials to turn around the ailing home improvement chain. Over the past several years, the company has tried to remake itself numerous times but has failed to find a profitable niche.
"At this stage in the business cycle, it gets very difficult to find other options," said Otto Grote, an analyst with Derby Securities. "Ten years ago, they had a good chance to do something. But when you're up against the professionals and you start making mistakes and you're not willing to spend money -- you lose out."