Struggling Hardware Chain Faces Financial Crisis Ernst Home Centers Scrambles To Pay Suppliers, Avoid Bankruptcy

Unable to keep its shelves adequately stocked because it can’t pay suppliers, Ernst Home Centers is caught in a downward spiral that may be leading the 103-year-old company into bankruptcy.

Spokane-based Jensen Distributing Services Inc., Ernst’s principal supplier in Washington, is no longer distributing to the chain.

“We put them on a cash advanced basis back in the first part of June because of their inability to pay us,” Mike Jensen, president of Jensen Distributing, said Wednesday.

Jensen Distributing has not filed suit to recover money it is owed by Ernst, but several other unpaid suppliers have sued the company.

The inventory difficulties are apparent at Ernst’s four Spokane stores. The Northpointe Plaza and Shadle Center stores have a number of empty or near-empty shelves, primarily in their paint, plumbing and electrical departments.

The company is saying little about its problems or how it intends to deal with them.

“What I can tell you is the plans and strategies for strengthening our company are disclosed in our most recent 10-Q filing,” said Jim Fox, a spokesman for the 86-store chain. “Beyond that, we don’t have any comment.”

But the 10-Q - a quarterly financial statement public companies must file with the federal Securities and Exchange Commission - is vague regarding the company’s strategy. It says only that Ernst has shelved its 1996 expansion plans and will close another store before the end of the year.

It says the company is looking into “a possible sale of assets or a possible financial or operating restructuring.

“If these efforts are not successful,” the document adds, “the company will consider all other alternatives available.”

Ernst was founded in Seattle in 1893. It prospered for many years, but intense competition for the hot home remodeling market in the Northwest during the 1990s and an outmoded small-store format have caught up with the company.

Regional competitor Eagle Hardware & Garden entered the market with huge warehouse stores, and national firms like Home Depot also have aggressively expanded in the Northwest.

Many of Ernst’s 86 stores, located in Washington, Idaho, Montana, Oregon, Nevada, Utah, Colorado, California and Wyoming, are small compared to the warehouse outlets. The company has been trying to open larger “superstores,” but even those have struggled. It closed nine of its superstores in cost-cutting efforts earlier this year.

After suffering significant losses in 1995, Ernst tried late last year to differentiate itself from its warehouse store competitors by shifting marketing strategies. It changed its product mix to try and portray itself as more a “homestyles” store than a hardware retailer.

But the losses continue to pile up. During the second quarter of 1996, Ernst lost $19.1 million on sales of $105 million, compared with losses of $2.2 million on sales of $126.5 million during the same quarter of 1995.

For the first half of 1996, the losses amount to a staggering $68.4 million on sales of $228.7 million, compared with a loss of $3.2 million on sales of $248.9 million during the first half of 1995.

Some of those problems can be attributed to a general downturn in the Northwest home improvement market. But Ernst’s most comparable regional competitor, Eagle, has managed to maintain its profitability.

Eagle earned almost $3 million on sales of $161 million during the second quarter this year, compared with earnings of $2.7 million on sales of $130 million during the second quarter of 1995.

John B. Rogers, a financial analyst with Jensen Securities Co. in Portland, and Mary C. Fleckenstein, a senior vice president with Ragen MacKenzie in Seattle, say some of Eagle’s growth is undoubtedly accounted for by the defection of Ernst customers.

“One would have to speculate that Eagle certainly has benefited from some of the problems Ernst has,” Fleckenstein said this week.

Both analysts also said Ernst’s strategy to soften its hardware store image doesn’t appear to have helped the company.

“It certainly hasn’t revived sales,” Rogers said. “In fact, sales have gone the other way.”

Fleckenstein said the change in strategy may have cut into Eagle’s sales initially when Ernst was liquidating a lot of its old product line at low prices, but, in the long run, the change has helped Eagle.

Rogers believes Chapter 11 bankruptcy protection will be a last resort for Ernst.

“A retailer doesn’t want to file Chapter 11,” he said, “because it damages relationships with customers so badly. Another possibility is that someone buys them. They are looking for that now. They want some sort of restructuring.”

But none of the big national players who want to solidify themselves in the Northwest are likely buyers, Rogers added, because Ernst is saddled with so many small stores.

Jensen, who doesn’t want to lose one of his big and valued customers, believes that whatever is going to happen will happen soon.

“They’ve got to do something to get themselves straightened out,” Jensen said, “so they can get back into business.”

, DataTimes