Hills Stores Company

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Hills Stores Company

15 Dan Road
Canton, Massachusetts 02021
U.S.A.
(617) 821-1000

Public Company
Incorporated: 1957, as Hills Department Stores Inc.
Employees: 18,650
Sales: $1.856 billion
Stock Exchanges: New York
SICs: 5311 Department Stores

A pioneer in the discount store industry, Hills Stores Company is the eighth-largest general merchandise discount retailer in the United States. Most of its stores are located in the Midwest and mid-Atlantic states. The company filed for Chapter 11 bankruptcy protection in 1991, as it faced large debt service from a leveraged buyout and aggressive competition from Wal-Mart and Kmart. It has since achieved a noteworthy recovery and is facing its competitors head-on.

The first Hills department store opened up in Youngstown, Ohio, in 1957. Founder Herbert H. Goldberger had operated hosiery stores before starting what quickly became a chain of discount stores. There were seven Hills stores by 1964, when the chain was sold to SCOA Industries, Inc. By the mid-1960s, there were 12 Hills stores sprinkled through Pennsylvania, Ohio, and West Virginia. Goldberger saw the company grow to 99 stores during his tenure as president, which ended when he turned the reins over to his son, Stephen A. Goldberger, in 1981. The chain grew to about 125 stores by the mid-1980s.

A Boston-based takeover pro, Thomas H. Lee, helped Goldberger acquire SCOA through a leveraged buyout in 1985. All of the company’s subsidiaries but Hills were sold off, but the $642 million deal left the discount retailer with substantial debt. Hills took on even more debt four years later, when it bought 33 Gold Circle stores from Federated Department Stores. Those stores formed part of the 41 new stores Hills opened in 1989. The expansion gamble did not prove to be a good one, however. The economy took a plunge, sales suffered, and Hills’s efforts to restructure its balance sheet failed. To complicate matters further, many of its stores were in the heart of Wal-Mart and Kmart territory. Carrying more than $900 million debt during a retailing recession, Hills could not afford to tune up its stores to take on its hefty competitors. The company filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code in February 1991.

After becoming the chairman of Hills, Lee began looking for someone to resuscitate the company. Michael Bozic had spent 27 years at Sears, Roebuck & Company, rising to become head of the Sears Merchandise Group, one of the company’s main divisions. As Hills’s new president and CEO, Bozic took swift action. The company closed 63 unprofitable stores and withdrew from some markets altogether—such as Nashville and the states of Georgia and Michigan. It concentrated instead on the locations that were already strong: Pittsburgh, Buffalo, and Ohio towns like Cleveland, Akron, and Youngstown.

A central distribution center was set up in a former Sears building in Columbus, Ohio. Virtually all merchandise would flow through this facility. This cut the costs of inventory control and overhead, as vendors could deliver merchandise to this site instead of to each of Hills’s stores. Cashiers were cut back to a transactions-per-hour standard. Hills also undertook a major remodeling program, though it did so on a budget. In 1992, Hills was spending about $650,000 per store, compared with the $2 million that Kmart was spending that same year. One of the shortcuts Hills took during remodeling was painting its stores white with modest-color trim. This cut the expense of warehousing a rainbow of paints, and helped to highlight the merchandise.

Another facet of Hills’s strategy was to target its primary customers: women shopping for values for themselves and their families. The merchandise mix at Hills was already tipped toward these customers, with an emphasis on apparel and toys. Instead of changing this mix, Hills decided to punch up its presentation. For example, the chain invested in new fixtures that displayed items so shoppers could see the fronts of sweaters, jackets, and blouses, rather than seeing long racks of clothes with only the sleeves showing. While the economies of scale available to larger companies like Wal-Mart meant that they could undercut Hills on the prices of many items, Hills had an advantage in that it mostly stocked soft goods and apparel, which generally commanded higher margins. In 1992, about half of Hills’s sales came from apparel and soft goods, compared to about 30 percent at Wal-Mart. Hills also launched a line of private-label apparel—basics for children and adults— called American Spirit. The line emphasized its U.S. origins by featuring shots of the factories where the apparel was made in the Labor Day advertising circular that introduced it.

Toys were also a Hills trademark. Most bigger discounters stocked up on toys near the holidays, then trimmed back again. Hills’s large year-round toy selection accounted for more than 10 percent of its sales. To make room, the company left items like sporting goods, appliances, automotive products, and lawn and garden supplies to its competitors. Hills’s strongest lines were apparel and soft items, like towels and sheets. Bozic summed up the company’s strategy in dealing with its giant retail competitors: “The trick is to dance with them and not fight with them.” By the end of 1992, Hills was the top performer in the discount retail store market.

By the end of 1993, 78 of Hills’s 151 stores had been remodeled and sales were a stunning $1.76 billion. In October 1993, the company emerged from bankruptcy, having won court approval for its reorganization plan a month earlier. That plan included the distribution of more than $540 million in cash, bonds, and company stock to creditors. To reflect its rebirth, the company changed its name from Hills Department Stores Inc. to Hills Stores Company. A banking syndicate headed up by Chemical Banking Corporation granted the chain an unsecured three-year working capital facility of $225 million. Hills gained confidence with its robust 1993 sales, but it was nonetheless sobering that two other discount chains filed for bankruptcy around this time: Rose’s Stores Inc. and Jamesway Corporation. Regional chains experienced great difficulty competing with the giant national chains like Wal-Mart, Kmart, and Target Stores.

Hills’s recovery was solid enough that it opened a new store in Reading, Pennsylvania, in 1994—its first since 1990. The new store—formerly a Kmart—competed directly with two Wai-Marts and a new Kmart nearby. Considered a prototype, the new store featured further improvements in its displays of women’s apparel as well as bar-code scanning and new department graphics. By this time, Hills had a total of 151 units, including six stores in Virginia and one apiece in Kentucky, Massachusetts, and Maryland. Sales in its midwestern and eastern states stores were steady, and Bozic was pursuing concessionaires for the stores that were more than 100,000 square feet.

Just as it seemed as though the company’s recovery was on track, a fight broke out among shareholders. An investment fund that owned just under 10 percent of Hills’s common shares, Dickstein Partners, L.P., pitched a stock-repurchase plan. Mark Dickstein argued that the company’s stock was undervalued and the board was not acting aggressively enough. Dickstein made his fortune by investing in bankrupt companies such as First Republic Bank in Texas and the retailer Carson, Pirie, Scott & Company. What worried Bozic and other Hills executives was that Dickstein’s plan would tack $150 million in debt onto the company’s balance sheet. Thomas Lee, who had led the leveraged buyout and amassed the debt that had contributed to the company’s bankruptcy in 1991, was still Hills’s chairman and his memory was fresh. Dickstein approached the shareholders for formal support for his plan. The battle had reached such a pitch by the fall that Dickstein made a bid to replace half of the company’s directors. But a truce was reached at the end of September, and Hills announced a $75 million stock buyback.

Hills closed 1994 with new optimism and announced an “aggressive growth plan” that included opening 15 new stores in 1995 and up to 20 stores a year for several years after that. Notably, the company opened two stores in Richmond, Virginia—considered Wal-Mart territory—in fall of 1994 and was stampeded by holiday shoppers headed for the Power Rangers aisle. This marked Hills’s furthest southeastern expansion. The stores included wider aisles for stroller-pushing shoppers, and Hills’s first newborn section. It also sold special-sized women’s apparel. By that time, Hills had remodeled all but 37 of its existing stores, leaving its weakest stores for last. Sales for 1994 topped $1.8 billion. The entire chain expected to have its new look in place by spring 1995, one year ahead of schedule.