Lamonts Apparel Inc. -- Lamonts Fashions Niche In Sluggish Retail Industry

LAMONTS

-- Holding company: Aris Corp.

-- Employees: 2,500

-- Business: retail apparel stores

-- Headquarters: Bellevue

-- Locations: 49 stores - 16 in Seattle area, 33 in Washington, Oregon, Alaska, Idaho, Montana and Utah.

-- Chief executive officer: Leonard Snyder

-- Sales: $189 million (first three quarters of fiscal 1990)

-- Losses (Aris Corp): $7.1 million, or $1.66 per share (first three quarters of fiscal 1990)

-- Current stock price: 62.5 cents

-- Major competitors: Mervyn's, Target, The Bon Marche

-- Strategy: Continue to fine-tune image as a brand-name fashion retailer by concentrating marketing and merchandising efforts to reach middle-income, suburban-oriented shoppers.

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Leonard Snyder, chairman and chief executive officer of Lamonts, clearly was enjoying himself last week as he escorted a group of visitors through his company's Northgate store.

Lamonts had just reported record third-quarter sales of $60 million, up 15 percent from a year ago, and $189 million in sales in the first nine months of its 1990 fiscal year, up 14 percent increase from $166 million in the same period a year earlier.

The sales growth sets Lamonts apart in a sluggish retail industry.

But even though Lamonts has succeeded in its merchandising and marketing strategies, it must cope with a staggering debt load that could threaten its long-term health.

Although Lamonts' sales were high, Aris Corp., its holding company, reported third-quarter losses of $3.5 million, or 77 cents a share, and losses of $7.1 million, or $1.66 a share, for the first nine months of its 1990 fiscal year.

Aris also must refinance a $45 million bridge loan, which provides much of the company's capital, before next spring. Several analysts say this could be difficult because of fears of a recession and difficulty in the retail industry.

Despite these problems, Snyder and many industry observers say Lamonts' sales growth, coupled with its new look and mix of merchandise, indicates customers have responded to its strategy of appealing to a ``moderate-income, fashion-conscious'' shopper.

``In the past three years, our overall merchandising strategy has jelled,'' Snyder says. ``We've truly streamlined our strategy. We've become very focused on our customer and what we are - an apparel retailer offering quality branded merchandise at affordable prices.''

A look at the Northgate Lamonts drove home his point.

Two years ago, the 50,000-square-foot store looked a little like a bargain basement. Bright lights and wide aisles revealed scads of linens, gift cards, novelty items, children's clothing and women's wear.

Retail consultants say customers did not know what kind of store Lamonts was, or whether the merchandise they purchased on one visit would be in the store on a subsequent trip. All shoppers knew was that Lamonts held a lot of sales.

Today, although sale signs still decorate the racks, the store's shopping environment has changed.

Soft lighting casts a calming glow on gray and ivory decor as the store's aisles meander around attractive displays of fashionable sweaters, a circular rack of pastel turtlenecks and a mini-department of Liz Claiborne fashions.

Upstairs, tiered tables displayed neatly folded Levi's jeans, and in a lingerie section, a satin nightgown introduced Lamont's ``Hidden Fantasies'' department.

Strolling through the store, Snyder pointed out fall fashion colors - rusts, dark greens, reds, purples, browns - which were reflected in rayon skirts, slacks, cotton socks and costume jewelry.

``For 10 years, this store did maybe $5 million business a year,'' Snyder says. ``It never made any money. Now, it constantly shows sales increases and is very profitable.

``It's a different store.''

Dick Outcalt, of Outcalt & Johnson: Retail Strategists, says: ``What they've done the best is change customer perceptions of what Lamonts is. That's a very difficult thing to do.''

By transforming itself from a chain that carried everything into a specialty apparel retailer, Lamonts eliminated the ``surprise'' factor customers often faced when they entered its stores, Outcalt adds.

``The customer used to say, `Lamonts? I don't know what I'll find there, but I know they've got great sales.' Now, customers can go in there regularly and find a good, reliable stock of merchandise,'' Outcalt says.

The shift began three years ago when Snyder left a chief executive spot at Minneapolis-based Donaldson's department stores to head Lamonts.

Under his guidance, Lamonts threw out most of its non-apparel items and discontinued poorly performing categories such as maternity wear and men's big and tall clothing. It remodeled all of the 31 stores it operated at the time and opened new outlets in several cities.

Most important, it established an image for itself.

``We decided we couldn't be all things to all people,'' Snyder says. ``We had to look at what kind of customer we wanted and what we could do to meet their needs.''

The shoppers to whom Lamonts chose to cater fit into what Snyder calls a ``moderate niche.'' They were working professionals aged 25-55 who earned $35,000 to $40,000 annually. Often, they were family-oriented and liked to shop in suburban malls and retail centers near their home.

Lamonts has limited its inventory to a handful of the nation's leading brand-name fashions. Liz Claiborne, Levi's, Osh-Kosh and Arrow are among a few. That fashion merchandise makes up 88 percent of the stores' inventories.

The remaining 12 percent consists of what Snyder calls ``predictables'' - solid shirts, turtlenecks, socks, etc. Much of that merchandise is sold under Lamonts labels such as Cascade Classics, Traditions, Studio Age and Cues.

This product mix has differentiated Lamonts from discount retailers such as TJ Maxx, Mervyn's and Target but has allowed the company to reach a ``middle-income'' shopper that may not be able to afford pricey fashions at The Bon Marche, Nordstrom and Frederick & Nelson.

Staying out of downtown retail district, which tends to draw more affluent shoppers, allows Lamonts to position itself in locations that are convenient to its customers, Snyder says. Most Lamonts stores are in suburban shopping areas and smaller towns.

In many ways, customers have responded. When the company's 1990 fiscal year ends Nov. 4, Snyder expect sales to be about $265 million, compared with $225.4 million a year ago. Three years ago, 1987 sales were $168 million.

Lamonts' popularity with customers also is reflected in its credit card accounts. Two years ago, the retailer did not have its own credit card. Now, it has 185,000 credit card accounts.

This popularity has encouraged Lamonts to continue expanding in the Pacific Northwest and Rocky Mountain states. It will open its 50th store next spring in Moses Lake and is building a new store in a Portland shopping mall.

Although Snyder describes Lamonts as a Northwest retailer, he says the company is considering an expansion into Southern California and Nevada.

Retail consultants and analysts applaud Lamonts' ability to redefine its image, but many point out that the merchandising strategy has come with a price.

Unlike the Lamonts of three years ago, the retailer today is highly leveraged. About 90 percent of the company's capital structure is built on debt, and the company incurred about $80 million in long-term debt last fall when it was sold to the Aris Corp., a Scottsdale, Ariz., company that had no operational divisions, for $135 million.

Part of the acquisition was financed by Lamonts' former owners, Northern Pacific Corp., a New York holding company owned mostly by Julius and Eddie Trump, under an agreement that Aris would pay $35 million to the company by 1995 at an annual 7 percent interest rate.

The remaining $100 million was financed with cash, $45 million of which came from the short-term bridge loan.

Aris' stock, which is traded over-the-counter, has plunged from $1.37 per share in January to around 62 cents per share in current trading.

Aris has attributed its continued losses to interest costs involving in paying off its debt and has said it does not expect to report a net profit for several years.

Andy Giordano, Aris chief financial officer, calls the losses a ``book loss'' and stresses that Lamonts has increased its cash flow considerably since the acquisition.

Cash flow - which is operating profit before interest, depreciation, amortization and other accounting adjustments - was $3.9 million for the quarter, compared with $2.7 million last year. Cash flow was $15.3 million for the first nine months, compared with $11.8 million a year ago.

``We might be reporting a loss, but we have more than adequate cash flow to cover our interest expense,'' Giordano said. ``Our strength lies in our ability to generate cash and pay our bills.''

However, Outcalt points out that much of the cash-flow increase

came from a $14 million inventory reduction.

``That's a little like having a home and selling off your furniture to make a monthly payment,'' Outcalt says. ``It can be positive if that inventory was in excess, but it is a one-time thing.''

Jeff Atkin, a retail analyst and principal with Kunath, Karren, Rinne and Atkin, added that the company's operating margin, or the money the company makes before factoring in its debt costs and other non-operating income, has weakened in the last quarter.

``From what I've seen, they've implemented their stated merchandising strategies well,'' Atkin says.

However, he expressed concern that the company's operating margin was not particularly high. For instance, Lamonts' operating margin in its first nine months was 1.58 percent, compared with Nordstrom's 5.23 percent.

A clearer indication may come in the next few months as Lamonts works to replace its bridge loan with permanent financing.

Atkin worries that fears of recession, an antipathy toward leveraged companies and poor performances by other retailers could deter lenders from investing in Lamonts.

He suggests that the company seek an equity partner, who could provide the financing in exchange for ownership.

Snyder says the company has been discussing an equity arrangement and other potential financing deals with potential investors.

Adds Giordano, ``In an industry with a reputation for problems, it seems the investment community hasn't quite yet singled out Lamonts as a winner.''

Strategies appears weekly in the Business Monday section of The Seattle Times.