Value Merchants May Have Stretched A Buck Too Far

Value Merchants' Everything's $1.00 stores are a kitsch-collector's dream. You can find hand-painted porcelain cocker spaniels, boxes of Bill & Ted's Most Awesome Breakfast Adventure cereal, and Wisconsin Badgers car shades--all for a buck each. "I think it's great," gushes Faye Elam, a 40-year-old homemaker from Oak Park, Ill. "I can get just what I need for $1!"

Some investors are less enthusiastic. A shareholder suit filed in U.S. District Court in Milwaukee on May 12 charges that Value Merchants Inc.'s top two officers, CEO Steven J. Appel and Finance Vice-President Ronald E. Skelton, violated federal securities laws by failing to disclose promptly that the company could match its 1991 earnings forecast only through an accounting change, which added 12 a share, or 9%, to its 1991 bottom line. The change, acceptable under accounting rules, boosted 1991 earnings by spreading store opening costs over a longer period. "I can understand why information might be considered incomplete if the only way the company achieved its results was through accounting changes," says Robert A. Bayless, a senior accountant at the Securities & Exchange Commission.

The plaintiffs allege that Value Merchants should have disclosed that by shifting more costs into the coming year, the change would hurt 1992 results. Indeed, on May 7, when the company acknowledged that its first-quarter loss would be deeper than projected, partly because of the deferred costs, its stock plunged 4 5/8, or 22.3%, to 16 1/8.

The company says it has complied with all securities laws and believes the suit is without merit. Appel and Skelton declined to comment, as did Value Merchants' outside accountant, Arthur Andersen & Co. A spokesman says that they are too deeply involved in negotiations to arrange financing for 1992 store expansions to be interviewed.

The fresh financing is crucial. Value Merchants says it needs $50 million to $55 million in funding to open the 200 Everything's $1.00 and 25 Toy Liquidators stores it has planned for 1992. The openings would nearly double its existing stores and boost 1992 sales to $408 million, from $235 million. But they'll also help create an estimated cash drain this year of $37 million.

Keeping up the growth streak may be the only way to prop up Value Merchants' stock. Last year, the company's shares zoomed from 11 to as high as 42, touching down at 31 1/4 at yearend. But in the last half of 1991, several outside directors dumped large stakes. And this year, the company announced that Everything's $1.00 same-store sales growth slowed from 17.8% in 1990 to 3.9% in 1991. Short sellers began circling, driving the stock as low as 14.

MISGIVINGS. Thomas R. Kully, an analyst at William Blair & Co., the investment bank handling the financing deal, says it probably will get done within 60 days. Yet even Kully, a bull on the stock, says the company's torrid growth has "encouraged less-than-conservative accounting." Value Merchants would not comment on that statement.

Whatever its outcome, the suit raises serious questions about Value Merchants' future. If the charges are borne out, the company's stock could end up in the closeout bin.

Before it's here, it's on the Bloomberg Terminal.