National Home Center Store Closings Could Restore Profits

Arkansas Business

National Home Centers Inc.’s announced closing of four stores since October has left chairman Dwain Newman admitting to embarrassment and frustration.

National’s 85,000-SF Conway home center closed in October. Its contractor facility in Rogers was consolidated with one in Bentonville in November. And, in December, the company said it would close its 150,000-SF Fayetteville store and its 38,000-SF store in Little Rock.

The cutbacks could return National Home Centers to profitability by next fall if it can sell the Fayetteville building, Newman says, but the company can’t forecast when the building might sell. Newman adds that he doesn’t expect any more closings in the near future.

“Our intent would be to shake ourselves loose from any property we’ve had to close,” he says. “That makes it vague when we will be profitable.”

A buyer already has been found for the Conway store, Newman says, but the deal won’t close for another three months.

With the cutbacks, National’s asset base is shrinking and its debt continues to rise. At the end of the third quarter of 1997, National Home Centers listed almost $33 million in long-term debt, up from $29 million on Jan. 31. Total assets are just $78 million, down from $85 million on Jan. 31. National’s ratio of long-term debt to total assets is 42 percent, up from almost 35 percent at the end of the fiscal year.

That 42 percent ratio is much worse than any other company in National’s peer group: eight companies whose stock National Home Centers measures against its own each year in its proxy statement.

The Hechinger Co., owner of the Home Quarters Warehouse stores, has a ratio of long-term debt to total assets of 36 percent. The Home Depot, the industry leader with 583 stores and sales of $19.5 billion annually, has long-term debt that’s only 11 percent of its total assets. Lowe’s Cos. has a ratio of 20 percent.

Those national home improvement giants compete directly with National Home Centers in each of its eight remaining markets except for Clarksville.

Additionally, Springdale-based National Home Centers apparently is having problems making debt payments.

National’s third-quarter report notes that the company was again in default on quarterly interest payments on a revolving credit agreement with BankAmerica Business Credit Inc. In the second quarter, BankAmerica waived those interest payments, but National was charged a waiver fee of $10,000. National Home Centers had similar problems with BankAmerica’s credit agreement during two quarters of 1996.

National Home Centers owes BankAmerica $20.6 million under the agreement. There is $1.9 million left to be borrowed on the agreement, which expires next December.

Downward Spiral

For more than six years, National Home Centers’ revenue has grown impressively. In fact, the company has been one of the fastest growing public companies in Arkansas. During 1992-96, it averaged annual revenue growth of 19 percent, going from $88 million in 1992 to $177 million in 1996.

But with National’s store closings and its problems competing against national chains, that streak will end this year. Revenue was off 16 percent through the first nine months this year. At that pace, revenue would total about $150 million for this fiscal year, which ends Jan. 31. With the closing of the Fayetteville, Little Rock and Conway stores, Newman figures the company’s revenue probably could be in the $125 million range next year.

Net losses have piled up dramatically in the past few years. National Home Centers lost $3.1 million in fiscal 1997 and $1.6 million in 1996. Through the first nine months of this year, it has lost $3.6 million. In the past 11 quarters, losses have totaled $8.3 million.

The stock has been in a downward spiral almost since the day National Home Centers went public in May 1993. The stock was offered at $10 a share and jumped to $14.50 in December 1993 when one national stock tipster picked the company as his favorite for 1994. By March 1994, though, National Home Centers was back to $10 a share, and it has fallen steadily ever since. It recently has traded in the $1-$1.25 range.

The stock’s decline began as Home Quarters was building its giant North Little Rock store, which opened in October 1993.

The biggest loser with the stock’s decline has been Newman himself. He owns about 63 percent of the shares, worth almost $45 million in 1993 but now worth only about $5 million, based on Wednesday’s closing price of $1.13 a share.

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Remaining Markets

National Home Centers retains stores in Conway, Russellville, Clarksville, Fort Smith, Springdale, Bentonville, North Little Rock and Rogers. The Fayetteville and Little Rock stores, which employed a total of 140 workers, began closing in early January and should be vacated in March. After they close, National Home Centers will have about 700 employees.

“The Rodney Parham store [in Little Rock] was, financially, even a better store than the Fayetteville one because we had so much invested” in the Fayetteville store, Newman says. “We probably went too long with the Fayetteville store, in particular, because it was a big loser for us.

“The Rodney Parham store, up until about three years ago, always was a money-maker for us. But the latest two Home Depot stores kind of really clipped us just enough that we couldn’t see that it could return to profitability.”

The North Little Rock and Rogers stores have significant retail business. The 206,000-SF Rogers store, the chain’s largest, is performing well and the North Little Rock store is the firm’s highest volume facility, Newman says.

At least one source familiar with the home improvement business in Arkansas believes National Home Centers’ decision to close stores is good.

“I think the moves they made are wise ones because the stores they closed I knew were problem areas for them,” says the source, who asked to remain anonymous. “The building supply business is just plain tough right now in Arkansas, particularly in Northwest Arkansas with the end of the building boom. When the building business took a lull there, it wiped out all those [contractors] in it for the convenience.”

The source was surprised, however, when Newman decided to close the store in Conway instead of the Russellville location.

“I can’t imagine the Russellville store is doing very well at all,” the source says. “Russellville is already a saturated market.”

One advantage of the store closings is that 75 percent of National Home Centers’ business will be with contractors, who have remained loyal to the company. Before the closings, 60 percent of the company’s business was with contractors. The profit margin is less with builders but the competition is not as fierce.

Two divisions of Arthur Andersen, the Economic and Consulting Group of Dallas and Senn-Delaney, are assisting National Home Centers with its reorganization.

“They’re really scrutinizing how we’re doing things from an operations standpoint, evaluating how we handle things. Are we spaced out enough in the store?” Newman says. “They’ve spent a lot of time in our Rogers store. It’s definitely a good sounding board.

“We’re trying to get rid of anything, close, do whatever we have to do to try to cut the losses. There’s nothing pleasant about any of that.” n