Wait A Minute Phar Mor Is Still Kicking

Last summer, Phar-Mor Inc. looked as if it would soon be no more. The Youngstown (Ohio) operator of 310 deep-discount drugstores had grown into a $3 billion dynamo in just 10 years. Then, Chief Executive David S. Shapira broke the news of a massive fraud scheme, including the falsification of Phar-Mor's books by some $350 million--all allegedly masterminded by Phar-Mor's president and co-founder, Michael I. Monus. Phar-Mor fired its auditor, Monus, and other executives, and filed for Chapter 11 on Aug. 17.

Monus has just pleaded not guilty after being indicted on 129 counts of fraud and other charges. But while the wheels of justice grind on, Phar-Mor does, too, to the surprise of many. "Phar-Mor has a viable business in there," says Boake A. Sells, the executive who brought drugstore chain Revco D.S. Inc. out of bankruptcy. Preserving that business has been the task of turnaround artist Antonio C. Alvarez, who came in as interim chief financial officer in August. After shuttering 55 stores, Alvarez has piled up $233 million in cash for his new employer--thanks largely to Chapter 11 relief from payments to creditors.

On Feb. 4, Alvarez was named Phar-Mor's new CEO. His new president and retailing strategist: David Schwartz, a veteran merchant who recently helped turn around Smitty's SuperValu, a Phoenix grocery chain. Says Schwartz: "I'm convinced the Phar-Mor concept is well-positioned for the value-conscious consumer of the 1990s."

That concept made Phar-Mor a scourge of more traditional rivals. Relying on buyers adept at pouncing on special wholesale deals from suppliers, Phar-Mor stocked up on name-brand merchandise at superlow prices. Bargain-hunting shoppers flocked to Phar-Mor's stores, which one analyst says looked "like a relief operation."

Relief is what these stores still need. Even though Alvarez has won backing from lenders and persuaded vendors to ship again, Phar-Mor has to reverse sliding sales. They aren't falling as fast as they were last summer. But sales at stores open a year or more are still off 5% to 8% from year-ago levels (table), partly because the chain stopped selling such items as office furniture and consumer electronics.

Morale at Phar-Mor was also devastated by the company's sudden unraveling. "Most companies that go into Chapter 11 do not believe that a month ago they were making a lot of money," Alvarez says. The more than $200 million Phar-Mor estimates that it lost in fiscal 1992 exceeds what anyone suspected last August. In January, Phar-Mor adjusted the amount of the alleged fraud to $499 million.

Meanwhile, the cost-cutting goes on. On Feb. 22, the company announced it would close an additional 31 stores. And in April, it is to submit a business plan outlining which stores it will keep.

Now, with Schwartz on board, Phar-Mor has some rethinking to do--about how large its stores should be and what merchandise to carry. Outsiders note that its pell-mell expansion into much larger stores left Phar-Mor with more expensive leases and higher operating costs than it can probably afford with deep-discount pricing. The store closings, plus renegotiations with landlords over leases, should help. But don't expect higher price tags. "The solution is to reverse the overexpansion, concentrate on the profitable stores, be efficient," Alvarez says.

GREETINGS. Sounds good, but Phar-Mor lacks the convenience and selection of a conventional drugstore or supermarket, and it can't match the low operating costs of a Wal-Mart or a Costco membership warehouse. Phar-Mor hasn't even finished installing checkout scanners, which can help monitor sales and control inventory costs. And the chain's "power buying" depends on the availability of wholesale merchandise at lower-than-usual prices. But supplier Procter & Gamble Co. is trying to put the brakes on such deals.

Schwartz argues that there are "still countless numbers of deals available" to support the power buying. And despite the bankruptcy, Phar-Mor has managed to cement relations with some key vendors. Recently, Gibson Greetings Inc. agreed to enlarge its already sizable greeting-card sections at Phar-Mor by a third or more--even though the chain's bankruptcy cost Gibson $27 million in unpaid bills and other expenses.

Such successes show how Phar-Mor may claw its way back even after suffering the double blows of bankruptcy and scandal. "We're here, and we're going to kick butt," Alvarez says. But if this is the decade of the value-conscious consumer, as Schwartz believes, it is also the decade of ruthless retail


      Sales In stores open a year or more, recent sales are off by 5% to 8%--an 
      improvement from the 10% to 15% declines after Phar-Mor filed for Chapter 11
      Stores Has closed 55 of the 310 stores it had before bankruptcy and announced 
      closing of an additional 31 on Feb. 22, leaving 224
      Employees Soon to be about 19,800, down from 24,500
Before it's here, it's on the Bloomberg Terminal.