WHY `BUSINESS STINKS' AT WOOLWORTH
For Woolworth Corp., the future wouldn't look quite so troubling if it didn't look so familiar. In 1982, the once-mighty retailer was stumbling, little more than a collection of aging five-and-dimes and a floundering chain of Kinney shoe stores. But starting in 1982, Harold E. Sells repositioned Woolworth as a profitable group of specialty retailers, including children's clothing stores, costume-jewelry shops, and the hugely successful Foot Locker sneaker chain. The chairman's strategy was a winner: Through much of the 1980s, Woolworth's earnings grew at a compound annual rate of 15%.
But oh, how the mighty have fallen: In the first nine months of this year, Woolworth's earnings plummeted 55%, to $75 million, on sales of $6.8 billion, up 0.8%. The stock, which as late as February had traded at 35, is down to 26, a 25% drop, compared with a 19% rise for specialty-retail stocks as a group.
Of course, times are tough all over in retailing. And Woolworth at least has earnings -- something plenty of its rivals can't say. But investors are hammering Woolworth largely because they had hoped Sells's specialty strategy would provide a better cushion against lean times. Foot Locker, for example, had seen its sales quadruple, to $1.5 billion, from 1983 to 1990, and its franchise among sneaker-hungry teenagers was supposed to be unassailable. Overseas, Woolworth had a decades-old German operation, where profits grew an impressive 70% in 1990, after unification gave East German shoppers access to Western-style retailing.
So what went wrong? Woolworth's growth engines simply aren't powerful enough to pull it unscathed through this recession. Foot Locker's U. S. sales are still strong, it's true. But 1991's estimated growth of around 10% is well below the 23% average of the late 1980s. The reason is simple enough, but probably irreversible: Americans are gradually getting sneakered out. "Business is still very good, but it gets tougher and tougher to do," says Glenn Hemmerle, CEO of Athlete's Foot in Atlanta, a big rival to Foot Locker. Sells, who started as an assistant manager at Kinney Shoe Corp., which Woolworth acquired in 1963, admits that the sneaker market will be saturated by 1995. Before then, though, he figures he can add an additional 600 Foot Locker outlets to the 1,352 already in the U. S.
As for Germany -- which last year accounted for 16% of total sales and 23% of profits -- there are still plenty of consumers willing to shop at Woolworth. At the Woolworth in Bonn's Bad Godesberg section, for example, money-pinched ethnic Germans from Russia shop alongside better-off burghers. Says shopper Alexander Stedtfeld, a 34-year-old father of two: "Woolworth used to have a bit of a poor-people's image, but I'll go anywhere I can pay less."
LOYALTY LAPSE. The German division, though, hasn't been able to match its astounding performance of last year, when millions of East Germans, suddenly flush with West German marks, scooped up consumer goods. With that surge gone, same-store sales in Germany were off 8% in the third quarter.
The results in Germany and at Foot Locker have revealed weaknesses in the rest of the Woolworth empire. Domestic profits at its nonathletic apparel stores -- which include Kids Mart, Richman Brothers, and Anderson-Little -- plunged 74.5%, to $13 million, in 1990. This year could be even worse. Richard N. Baum, a retail analyst at Sanford C. Bernstein & Co., says the apparel chains will likely report losses for 1991 (table). "Competitively, these businesses are not as strong as other people in the same segments," says Baum. Indeed, apart from Foot Locker, few Woolworth divisions enjoy an especially loyal following or strong franchise. Many are also concentrated in the recession-mauled Northeast.
The 1,312 Kinney family-shoe stores are a case in point. The chain has been shrinking in size as the family-shoe market loses customers to more specialized outlets, and Kinney sales should be off 3% to $688 million this year. Baum estimates that Kids Mart, a 428-store clothing chain, will report a $4 million loss this year. It's being battered by a price war between giant Toys 'R' Us Inc.'s children's clothing chain, Kids 'R' Us, and department stores desperate for business. "We get caught in the middle," Sells says. He recently replaced Kids Mart's management but admits: "I don't think we have the answer on how to do it yet." As for Woolworth's Richman and Anderson-Little stores, they sell inexpensive suits -- but even these are hardly a hot item for hard-pressed shoppers in a recession.
GRAND SLAM. Then there are the old five-and-dimes. They must now compete with the big discounters but don't have the economies of scale to offer the lowest prices. The upshot? "Business stinks," says the assistant manager of a Woolworth store in Manhattan. And he's none too optimistic about Christmas: "I hope it's not like hell," he says. Sells's plans for the five-and-dimes include closing about 20 stores a year and building up Woolworth Express, smaller, streamlined variety stores that sell such high-volume merchandise as health and beauty aids -- and garner roughly double the sales per square foot of the old stores.
But what Sells is really hoping for is the kind of grand slam Foot Locker was in the 1980s. Now in the on-deck circle: Champs Sports, a mall store that sells footwear, sporting goods, and apparel featuring pro-team logos to teenagers and men; and, once again, Foot Locker. At Champs, sales have soared from $18 million in 1987 to an estimated $397 million in 1991, according to Bernstein's Baum. As for Foot Locker, Sells has "tremendous plans" to open 100 stores a year in Europe, where demand for athletic footwear is far from saturated.
Champs and Foot Locker could well turn into outstanding performers. But as Woolworth has discovered, putting a couple of stars in a show doesn't necessarily make it an enduring hit.Laura Zinn in New York, with bureau reports