Restructuring not well-received on St.

Don Hogsett, Staff Staff, September 23, 2002

Shares of WestPoint Stevens, already deeply depressed, were pounded into the ground, losing more than a fourth of their value and sinking far beneath the dollar mark — which could trigger a delisting on the Big Board if the stock stays beneath $1 — when the major mill cut its sales guidance for the balance of the year and announced a further overhaul of operations designed to reduce towel capacity, cut manufacturing costs and save about $10 million a year.

Usually investors applaud when companies say they're cutting costs and restructuring, betting it means stronger profits somewhere down the road. But for the past several years, since spending too much money to build far too much towel capacity — just before terry imports started flooding into the United States — WestPoint and ceo Holcombe Green Jr. have been made punching bags on Wall Street. And once again the company was rocked when it put out what should have been good news for investors — but at the same time talked about disappointing sales, most notably to Kmart, one of its biggest customers, where it's a key component of the Martha Stewart Everyday program.

By shortly after noon last Friday, WestPoint shares had plunged more than 28 percent, or $0.31 a share, to $0.79 a share. Shares of the major mill have sunk over the past few years by almost 98 percent, from a high of about $33 before the long, unchecked slide began.

Building upon a streamlining that began two years ago, WestPoint said it will now reduce some of its terry capacity, shifting production at one of its plants, not yet named, from terry to its rapidly growing basic bedding business. At the same time, WestPoint said it will shutter some of its unprofitable retail stores. The company operates 59 retail stores selling its own and other products.

And with Kmart Corp. reporting that same-store sales tumbled at a double-digit pace during the summer, WestPoint lowered it own sales forecasts as well. Earlier, WestPoint had forecast growth of 2 percent to 4 percent for 2002 and now is lowering its guidance to about 2 percent growth. "In particular, sales to Kmart have deteriorated further from previous estimates," said Chip Fontenot, WestPoint president and coo. "Taking proactive steps to manage our inventory, we have increased our downtime in the third quarter and for the remainder of the year and anticipate higher levels of selloffs in both quarters."

Chip Fontenot said the major mill will begin a "further rationalization of our towel operations that will free up capacity to support our expanding basic bedding division. We are also streamlining our retail stores division, closing non-performing stores. Both actions will substantially improve cash flow and profitability."

Adding up the cost of shifting production at one of its plants from towels to basic bedding, WestPoint said it will record a pre-tax restructuring charge of $36.5 million, or $23.4 million after taxes, reducing earnings by about $0.47 a share. About $20 million of the pre-tax charge will consist of non-cash items. All told, the moves will save the company about $10 million a year.

Putting the best possible face on the news, Lorraine Miller, investor relations chief for WestPoint, told HTT, "There's actually a lot of good news in there. We're taking one plant, which we haven't identified yet, and shifting it from towel finishing to basic bedding production. We take out some towel capacity we don't need; but at the same time we still have all the capacity that we do need. At the same time, our basic bedding business is really growing, and this allows us to step up production and keep up with demand."

Miller added, "We have a total store base of 59 stores, and not all of them are profitable. It's no secret that the retail business has been tough, and factory stores like ours are getting more competition from traditional retail channels. So we're shutting down some of the stores where we aren't making money. We haven't said which stores, or how many, yet. And in the process of doing all of this, we can generate savings of about $10 million a year. So all of this sounds like a good thing to me."

But blended in with the good news is some bad, Miller acknowledged — lowered profits due to the restructuring charges and lower sales due to Kmart. "We still have some problems to work out; we still have to figure out what to do with our Kmart business," Miller acknowledged.

Importantly, Miller emphasized, "We have the support of our banks. They're with us on this. And we still expect to generate cash flow. We still expect to pay down debt this year."

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