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  • HEILIG-MEYERS TO SELL ITS 236 MATTRESS STORES: DIVESTITURE MAY ENABLE RETAIL GIANT TO PAY DOWN ITS DEBT

HEILIG-MEYERS TO SELL ITS 236 MATTRESS STORES: DIVESTITURE MAY ENABLE RETAIL GIANT TO PAY DOWN ITS DEBT

Heilig-Meyers' plan to sell profitable Mattress Discounters is a positive step toward getting the nation's largest furniture retailer back on track, according to an industry analyst.

The retailer revealed that it is weighing the divestiture of 236- unit Mattress Discounters and 96-unit Rhodes. It also named turnaround specialist Don Shaffer as its new president and chief operating officer. Shaffer is a former president of Sears Canada. Example: Queen size futon

Proceeds from the sale of Mattress Discounters and Rhodes would allow the retailer to pay down debt and refocus its business on smaller, credit-oriented markets, said Bud Bugatch, senior vice president of equity research at Raymond James.

"It's painful medicine, but it's appropriate medicine," Bugatch said. "It's really the first time in several years that I believe that Heilig-Meyers is on the right track.

"Mattress Discounters is a jewel; it's a valuable property," Bugatch said. "But that's what they need to sell to handle those obligations. It will take a lot of debt off the books."

Bugatch said he expects an announcement on the divestiture of Rhodes to come sometime in the fiscal first quarter, followed by the disposition of Mattress Discounters, perhaps in the second quarter and futon mattress reviews.

"Then, the prospects for Heilig-Meyers start to look a lot better," he said. "There are some other things Heilig-Meyers has to do; there will be some other shoes to drop."

He declined to speculate on other possible moves.

For 1998, Rhodes and Mattress Discounters accounted for $695.5 million of Heilig-Meyers' $2.7 billion in total revenue. Rhodes lost approximately $40 million in 1998.

The divestitures will allow Heilig-Meyers to return to its core market: small-town America. "It'll be a coast-to-coast retailer, even after the divestiture," Bugatch said. "But it will be focused in the market it knows best, which is a credit-intensive, predominately small- town market."

The acquisition of Rhodes, Bugatch said, "was an example of a company's attempt to get bigger, but not necessarily better.

"I thought it was not a good fit for Heilig-Meyers," he said. "Rhodes put them into major

metro markets, where Heilig-Meyers had not been particularly successful. Heilig-Meyers is a credit-intensive format that is not that successful in major markets where you have a more sophisticated credit purchaser."

HEILIG MEYERS TO SELL ITS 236 MATTRESS STORES DIVESTITURE MAY ENABLE RETAIL GIANT TO PAY DOWN ITS DEBT

Despite Heilig-Meyers' strategic moves, credit ratings companies were still doubtful about the retailer's ability to right itself.

Standard & Poor's placed Heilig-Meyers' double-`B'-plus corporate credit rating on CreditWatch with negative implications and placed its double-`B'-plus senior unsecured debt rating on Heilig-Meyers' MacSaver Financial Services on CreditWatch with negative implications.

Duff & Phelps Credit Rating Co. (DCR) also placed the MacSaver rating on Rating Watch-Down. " . . . There is uncertainty in the timing and ultimate proceeds from the planned asset sales, the loss of cash flow from the dispositions and the likelihood of more strategic changes," according to DCR. "Finally, the magnitude of debt reduction and its impact on the company's leverage will be key considerations going forward."

Standard & Poor said it would meet with management to evaluate Heilig-Meyers' business plan and financial condition to determine the impact on the ratings.

"The potential rating downgrade really reflects what's been going on operationally," Bugatch said. "While that news is certainly not welcome, it really is coming late, after the company has already taken actions designed to specifically remedy those problems. I don't think this should scare anybody."

On March 23, the Heilig-Meyers board of directors declared a quarterly dividend of 7 cents per share.

Heilig-Meyers is the largest retailer of furniture and bedding items in the United States. The company operates 815 Heilig-Meyers, 236 Mattress Discounters, 96 Rhodes and 70 RoomStore locations in the United States, and 32 Berrios locations in Puerto Rico.

Other Post: Betting on bedding: mattress vendors look to September Market to start turnaround for industry

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