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Zayre Losing Money on HomeClub Acquisition

January 28, 1987|LESLIE BERKMAN | Times Staff Writer

A year after its $151-million purchase of HomeClub Inc., the Zayre Corp. is losing money with the home-improvement chain, and some industry analysts are saying that the acquisition was a big mistake.

Herb Zarkin, 48, who last August succeeded HomeClub founder Robert J. McNulty as the Fullerton-based company's chief executive officer and president, blamed unexpectedly fierce competition, the costs of establishing new stores and inadequate inventory and financial controls for HomeClub's poor results for the 1987 fiscal year, which ends Saturday. He also predicted that HomeClub will make a profit in its fiscal 1988.

Exactly how badly the once-publicly traded chain of warehouse-style home centers is doing is unknown because Zayre does not report financial data on the individual businesses it owns. But while Zarkin would describe HomeClub's loss only as "marginal," an analyst with the investment firm of Adams Harkness & Hill estimated it at about $5 million for the year.

Zarkin denied reports from some retail industry analysts that Zayre was sold "a bill of goods" when it bought HomeClub and that the giant retailer is waking up to the fact that it will never realize an adequate return on its investment.

HomeClub hasn't been profitable since it was founded in October, 1983--a situation caused in part by the costs of expanding from two to 28 locations and building a work force of about 3,600 employees in just three years .

But Zarkin said Zayre will have a "very acceptable return" on its investment in HomeClub over the next several years, starting with a profitable 1987.

"We are going to be profitable this (coming fiscal) year, no matter what, barring an act of God," Zarkin said.

But Zarkin's optimism about HomeClub's future is not unanimous in the retailing industry.

"My view is that it is not going to work," said Terry McEvoy, specialty retailing analyst with the New York investment firm of Smith Barney, Harris Upham & Co.

He said that while he expects HomeClub to make some money in the coming year, the company never will reap the 20% to 25% returns on investment that Zayre gets from its other operations, which include a discount department store chain with 365 outlets east of the Mississippi.

Predicting that HomeClub will never achieve a return of more than 10%, McEvoy said he believes that Zayre eventually will convert its HomeClub stores to general merchandise operations similar to Price Club or will sell them to other retailers.

Likewise, Dan Wewer, an analyst for Robinson Humphrey in Atlanta, said he believes that if HomeClub still exists in four years, it will exist as a chain with the general merchandise format with which Zayre has more experience.

Rock-Bottom Prices

Wewer said he believes that HomeClub must change because it has lost the leadership of its founder, McNulty, who designed the company to sell a wide variety of home repair and improvement items at rock-bottom prices, utilizing bare-bones warehouse sales outlets and high sales volume, and charging customers a membership fee.

Other analysts, however, say that McNulty--however innovative his plan for the company--jeopardized HomeClub's survival by failing to install the sophisticated inventory and financial controls needed by such a rapidly growing enterprise.

"Had HomeClub stayed independent, they would have had some very rude surprises for their shareholders," said Harry E. Wells, analyst with the Boston-based firm of Adams Harkness & Hill.

Under terms of Zayre's acquisition of HomeClub, McNulty agreed to stay on as HomeClub's president for three years. But some industry observers say that McNulty began neglecting HomeClub as he became involved in establishing new enterprises.

Zarkin said he understood that McNulty was released from his contract obligations at Zayre by mutual agreement. Ultimately McNulty went to work as chairman and chief executive officer of SportsClub, a Long Beach-based, warehouse-style sports equipment retail business that he founded.

"I left because I wanted to do something else," McNulty said.

'Got to Be Something Good'

Denying that HomeClub lacks potential, he asserted that because Zayre "paid 3 1/2 times book (value) for the company . . . there has got to be something good about it." He estimated that HomeClub's revenues for its 1988 fiscal year will be "close to $1 billion."

Zarkin, who previously worked in Boston as executive vice president and director of marketing and real estate for Zayre's discount department stores, said he learned soon after taking the helm at HomeClub that major changes were needed in the company's financial and inventory controls.

He said HomeClub's growth plans for 1986 were pared back while the company spent $10 million to begin revamping a computerized management accounting system that keeps track of sales and determines which merchandise should be reordered and in what quantities. Another $10 million will be spent on perfecting and expanding the system over the next few years, he added.

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