Montgomery Ward: The Monkey On Ge's Back

Can Ward map a survival plan before Welch shuts its doors?

When General Electric Co. CEO John F. Welch and the new head of Montgomery Ward & Co. met at the Kentucky Derby on May 3, it's a safe bet they weren't just sipping juleps.

No, Welch had more pressing matters to discuss. GE's $1 billion investment in the ailing retailer, the result of a 1988 leveraged buyout, finds itself in dire straits. Roger V. Goddu, the Mr. Fixit GE brought in from Toys `R' Us Inc. in January, is scrambling to devise a new business model for the chain, while a team from GE Capital Services tries to salvage the company. Welch wanted to discuss the management team Goddu was assembling for the task. "I think they've got a good shot," Welch says, but "it's a tough go. The retail business is brutal."

DOOMSAYERS. That's an understatement. Ward lost $237 million in 1996 on sales of $6.6 billion as buyers soured on its mix of discounted consumer electronics, cheap apparel, and appliances. Same-store sales in 1996 slipped 11% from year-earlier levels. The hemorrhaging continues. Ward says losses in the first half of 1997 may hit $250 million. And some $1.4 billion that Ward owes banks and insurance companies comes due in August. Since late April, GE has had to pony up $200 million in inventory financing to calm nervous vendors, leading some retail experts to conclude that Ward is doomed. "They're not going to be able to stave off bankruptcy," says George H. Whalin, president of Retail Management Consultants in San Marcos, Calif. Goddu says he can sell assets to avoid Chapter 11.

If the retailer seeks bankruptcy protection, it would be GE's most embarrassing gaffe since a trading scandal at its Kidder Peabody & Co. subsidiary in 1994, which triggered a $1 billion-plus write-off. GE refuses to speculate about a Ward bankruptcy. But, says investment bank Rodman & Renshaw, GE would stand to lose at least $500 million.

GE is determined to avoid such a fiasco. It aims to sell or close some stores. GE also wants Ward to sell its Signature direct-mail unit, which posted an operating profit of $71 million on $741 million in sales in 1996. GE officials say they already have offers, and analysts say the unit could fetch close to $1 billion. "Signature is the company's principal asset," acknowledges GE Capital Executive Vice-President Edward D. Stewart. With the money in hand, GE would pay off the existing bank and private-placement debt, Stewart says, and put together a new debt package backed in part by Ward's real estate assets.

Meanwhile, Goddu wants to refocus Ward's retail operation, too. "A lot of people have been critical of Ward for not having an identity," he says. Goddu says he believes there's a niche for Ward between bargain-basement discounters and mass merchandisers such as Sears and J.C. Penney.

IN GODDU'S HANDS. Ward's problems go back nearly a decade. After Bernard F. Brennan and GE Capital took Ward private in 1988 in a $3.8 billion highly leveraged buyout, Brennan tried to spruce up the chain. But after some initial success, that effort failed, and GE pulled the plug on Brennan's reign last fall, replacing him with Goddu. Now, Ward's fate--and that of GE's investment--rests on the plan that Goddu's team puts together.

Retail industry executives, though, doubt the chain can bounce back. Sears already has beaten Ward to the punch in targeting more affluent consumers, and discounters such as Circuit City have all but forced department stores out of their niche in consumer electronics. In the end, Ward may get the famed Welch treatment--fix, close, or sell. Few think Ward can be fixed, and the retailing business doesn't need more capacity. If GE can't turn this one around fast, a Ward fire sale may be the only option.

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