MAKEOVER FOR A PLAIN-JANE RETAILER To avoid a raider, Carter Hawley Hale spun off its glamour-girl specialty outlets. Now it is spiffing up old-fashioned department stores with snappy merchandise and service.
By Bill Saporito REPORTER ASSOCIATE Stephen J. Madden

(FORTUNE Magazine) – THE ONLY BARGAINS found in department stores these days appear to be the stores themselves. Long before the market crash, such retailers as Allied Department Stores, Associated Dry Goods, and Federated Department Stores were selling at wholesale, marked down below the value of the buildings and the leases they owned. Bargain hunters might put nearly every company in the business in play. Associated Dry Goods Co. merged into May Co.; Allied was taken over by Campeau Corp., now pursuing Federated. For its part, Federated prefers to be owned by R.H. Macy & Co., a notable merchant that took itself private in 1986 before someone else could acquire it. One retailer has managed to evade capture in this scramble: Carter Hawley Hale Stores Inc. This Los Angeles merchant has twice repelled takeover attempts from Leslie Wexner of the Limited, the women's sportswear and apparel chain. The question for stockholders and the merger-prone retailing industry: Is Carter Hawley Hale better off as an independent company? Victory was costly. In a maneuver that deprived Wexner of the very stores he wanted, CHH's chief executive, Philip Hawley, spun off the company's specialty stores -- including the two glamour girls of retailing, Bergdorf Goodman and Neiman-Marcus -- to the shareholders in August 1987. Wexner went away, and Hawley was left with five plain-Jane department store chains catering to middle-income customers, who have been doing more of their shopping at discounters or specialty stores. Some Wall Street analysts were left with the impression that Phil Hawley was overstocked in ego but a little short on inventory between the ears. Hawley justifies the jettisoning of the specialty stores on the ground that their future earnings were fully reflected in CHH's stock price, whereas the department store earnings were substantially discounted. A spinoff was in the works even before Wexner's second foray, he says. He believes the split will free management to exploit the well-hidden profit power of its five department store divisions: the Broadway-Southern California, the Broadway-Southwest, Emporium Capwell in the San Francisco Bay Area, Thalhimers in the Southeast, and Weinstock's in northern California, Utah, and Nevada. IN HAWLEY'S VIEW department stores are sleeping giants, rendered inert by their own flawed marketing policies. Too busy expanding from downtown into the suburbs to bother managing their costs, retailers simply raised prices instead. When price increases couldn't cover escalating operating costs, merchants began withdrawing service and hiring more part-time help to cut expenses. Sales staff salaries as a percent of sales declined steadily, from 8.5% in 1971 to 6.9% in 1986, according to the National Retail Merchants Association. ''Department stores have been charging customers more and giving them less,'' says Hawley wryly. ''That is not a sure-fire formula for success.'' Now he must expand a business that is out of fashion and improve its profitability at the same time. Only then can he show his shareholders that he can do more for them than Leslie Wexner could. Wexner's final offer was $60 a share in cash. In the spinoff stockholders traded one CHH share for $17 cash plus one share each of the new CHH and the Neiman-Marcus group. CHH's new stock was pegged at $13; Neiman's at $38. CHH was recently selling for $10.625, while Neiman cascaded to $15.25. To pay for the restructuring, which included a recapitalization, a stock buyback, and the spinoff, Carter Hawley took on more than $1 billion in debt, winding up with a negative net worth. This year the company will have to pay interest of $135 million, which is $3.4 million more than the department stores' pretax profits for the last fiscal year. Sales were $2.6 billion. To meet its own projections of $3.2 billion in sales and $111 million in earnings by 1991, CHH must improve its pretax return on sales from 5.1% last year to 9.4%. That's a tall order: The industry average is 8.3%. Over the past 20 years the company's earnings have been anything but consistent. In 1979 CHH earned $69.1 million, in 1986 a scant $4.2 million. Says an ex-manager: ''Carter Hawley has been in transition for an awfully long time. As a company we've been challenged for years to get profits to the bottom line.'' HOW IS CHH going to break out of the rut? By pushing service. Says Hawley: ''Service is first, middle, and last. It's the critical issue we are going to win or not win on.'' But improved service is today's retailing fashion. Wake any merchant out of a deep sleep and he says, ''Can I help you?'' In addition to having bodies on the sales floor who treat customers as though they really mattered and paying salespeople commissions rather than salaries, CHH intends to offer a wide range of current merchandise that is fairly priced and in stock. Sounds like a department store -- the ones most people remember from 25 years ago. This season's service ensemble, however, comes with three high-priced accessories: cost, know-how, and culture. It is expensive to place people on the sales floor, and department stores cannot stay competitive by adding overhead or raising prices. Second, a company that needs to improve service more than likely doesn't understand it very well. Finally, new training has to be accompanied by a change in the culture. Hawley figures he has three to five years to whip a staff that at its worst consisted of part-time, gum-chomping Valley girls into a crack professional outfit that can compete among established, high-service chains like Nordstrom. CHH claims to have a service ace to play. Before the spinoff, the company lifted the training program out of Neiman-Marcus, a store well practiced in the art of customer service. The sales force is now being dipped in the Neiman potion to learn such selling techniques as approaching the customer immediately rather than waiting to be asked for help. Good students quickly learn to increase both the items and the dollars per transaction by deftly trading the shopper up to better merchandise or additional purchases. It requires considerably more ability to sell a customer a $40 Perry Ellis shirt than to ring up a $20 Arrow, or to sell a shirt and two ties rather than just a shirt. Clerical work once done on the sales floor, such as ticketing and attaching antitheft devices to garments, is now being handled in the warehouse so that the salespeople are free to sell. CHH is throwing money at the problem too. The company has spent $90 million in the past three years to convert its sales staff from hourly employees to commission sellers. The conversion meant hiring more people and paying them more. Sales folk now take home 6% of the action. Along with being a great motivator, commissions have the indirect benefit of decreasing absenteeism on busy days like Saturdays -- hourlies have a tendency to avoid crowded stores, showing up least when needed the most. The company has increased its full-time sales force to 48%, vs. the industry standard of about 20%.

The new model sales force is not yet a resounding success. Many commission sellers are not meeting their quotas, and with the labor pool tight, turnover is high. Says an executive at a competing store: ''I don't think the Broadway has made a dent. When we talk about our competitive problems, Broadway's level of service doesn't come up. And if somebody wants to make a lot of money selling, they go to Nordstrom.'' Of CHH's rivals, only a few have converted to commissions, and some have backed away from experiments in individual stores. TO SHARPEN its fashion image, CHH is attempting to stay in stock on a wide variety of goods, boost its private-label business, and upgrade such departments as women's apparel and men's shirts. The idea is to narrow the selection to the customers' known wants and be sure those items are always in stock. Says Hawley: ''The game is really to have less of what they don't want and more of what they do want -- it's that simple.'' For example, the five chains have enlarged their inventory of men's dress shirts by 50%. At the same time they limited the offerings to such midpriced designers as Yves St. Laurent and Calvin Klein and eliminated cheap knockoffs. The strategy has been repeated in such frequently purchased items as hosiery. ''Career women need hosiery. And if they're confident I have it all the time, they're going to come more often to me,'' explains H. Michael Hecht, CEO of the Broadway-Southern California, the company's biggest division. When the shoppers show up for panty hose, Hecht's trained sales force will hit them with huge assortments of relatively low-priced accessories such as handbags and costume jewelry. Carter Hawley is just beginning to catch up in private-label selling. By manufacturing goods and selling them under its own labels, the company can create cachet for items available nowhere else and at the same time capture the distributor's as well as the retailer's profits. CHH sells 15% of its merchandise as private label, vs. Macy's 20%. To sell more, Carter Hawley created a central market services operation in New York City to give it leverage with overseas manufacturers and more say in the design. When merchandise doesn't move, Hawley's legions are under orders to mark it down and get it out, a concept called currency. Aging standards are in place for all categories of merchandise. In junior dresses, for instance, a category with the half-life of chopped liver, the boss wants 90% of the merchandise to be less than 90 days old. So a slow seller may get knocked down 20% its 31st day on the floor. But CHH aims to sell more goods at full price without taking markdowns. Since all department stores offer almost daily sales promotions -- a genteel term the industry prefers to clearance sale -- shoppers believe that they don't have to pay the initial markup for anything. Some merchants commonly hike their goods up outrageously in order to put them on sale. By taking more realistic markups at the beginning, CHH hopes to sell more goods at full price. Indeed, the Broadway's Christmas sales volume was solid enough to let the company cancel a traditional end-of-December clearance last year.

A third critical component in retailing is as strong a competitive factor as service and fashion image: information management. This is one area where CHH is out in front of the pack. Retail is detail, but the bar-code scanning that helps supermarkets keep track of their immense inventories has yet to make much headway in department stores. CHH, however, spent four years and $150 million developing a management information system that collects 87 discrete pieces of information for each of two million items in all 112 of its stores on a daily basis. Buyers know how well each store is selling an item and can balance sales against inventories on hand and on order. Says Serena S. Kokjer, vice president of information management: ''We can find out how well a 15 1/2/ 34 yellow dress shirt is selling in Pasadena if we want.'' Though the customers don't care if the management information system is IBM or Fisher-Price, they care plenty if the goods they want are out of stock. Under the computerized Basic Stock System, such CHH stores as the Broadway have been able to reduce their out-of-stocks to 9% from 19% in categories like hosiery, shirts, and cosmetics that the stores consider ''basic.'' The industry out-of-stock average for all goods is 20% to 25%. Hecht of the Broadway thinks the company can sell nearly a third of its merchandise under the basics system. An added benefit is that the system can reorder goods automatically, thus decreasing the number of buyers and assistants needed. Those who remain can concentrate on fashion merchandising rather than tracking down short shorts. Behind the scenes the company has also slashed costs $35 million by centralizing the nonsales operations of its five divisions. Five separate billing and payment operations, for instance, have been consolidated at one place. In the warehouses high-speed sorters have sliced the time a garment is received, marked, placed on a hanger, and shipped to a store to two days, from four, and lowered the cost of doing so by a third. Strategically Carter Hawley Hale's plan is sound. The company has refocused its attention on the customer and lowered its cost of doing business. But much of the plan's success depends on the intangible: the company's ability to change its culture. Says one former insider: ''It's tough under the best of circumstances, and we are not under the best of circumstances. On the other hand, Phil is a focused, dedicated kind of guy who usually gets to his goals.'' IF HAWLEY reaches his goal of making over Carter Hawley, his success, though late in coming, would redeem a career that had paled in the shadow of his predecessor, the legendary Ed Carter. Carter led the charge into the suburbs and oversaw the company's growth in California's unrelenting boom in the Fifties and Sixties. Hawley, who started as a buyer in 1958 for Broadway-Hale Stores, a CHH corporate forerunner, became president of the company in 1972, just as competition began getting pernicious and the easy growth slackened. An elegant and, as one would expect, well-tailored executive, Hawley, 62, has so far been unable to imbue his stores with any of his own considerable style. CHH has suffered from being neither fashionable nor consistent. Visually the stores lack excitement; many could use an overhaul. Although the company is doubling its budget for store remodeling to $50 million, Macy's reportedly spent that much rejuvenating a single store. In its first two quarters as a department store entity, CHH increased its operating profits 45% over the prior period. Independent surveys of shoppers show that the company's service, measured by how pleased shoppers are, is increasing at a higher rate than its competitors'. But sales per existing store have barely budged, and neither has market share in Los Angeles and San Francisco. The good news is not overwhelming. Says Hawley: ''If it's a ten- + mile journey, then we're four miles down the road.'' And the last six are going to be the hardest.