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Saturday, July 13, 1996 - Page updated at 12:00 AM

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Ernst To Continue Despite Bankruptcy

Seattle Times Business Reporter

Ernst officials vowed to continue operating the 103-year-old chain of home-improvement centers, despite filing for bankruptcy yesterday.

But in what form remains to be seen.

Ernst Home Centers became the lastest in a string of Puget Sound retailers that have filed for Chapter 11 bankruptcy reorganization in the past few years. But analysts said the company's problems had more to do with Ernst itself than the health of the local economy.

Threatened by the encroachment of big-box home-improvement chains into its territory, Ernst Home Center responded both as predator and prey.

It tried to evade the likes of Eagle Hardware & Garden and Home Depot by building new stores in smaller markets. At the same time, it sought to take on its competitors directly by building larger superstores, though nothing quite the size of Eagles and Home Depots.

With growing losses and dwindling market valuation, the historic Seattle retailer wasn't strong enough to do both, analysts said.

Ernst, which filed for bankruptcy in Delaware, has lost $116 million in the past three quarters. The company said it would close 25 of its 86 stores, 43 of which are in Washington state.

But it did not disclose which stores will be closed or how many of its employees would lose their jobs. At the time of the filing, Ernst reported assets of $252 million and liabilities of $257 million. Its largest creditor is Jensen Distribution Services of Spokane, which is owed $4.5 million for hardware items.

If the company is to emerge from bankruptcy, the first thing it will have to do is settle on a strategy, perhaps one that concedes part of the company's territory to Eagle, Home Depot and Home Base, analysts said.

Pat Johnson of Outcalt & Johnson, retail strategists in Seattle, outlined four ways a business can grow.

"They can try to take their same product mix to the same types of customers," she said. "They can take the same mix to new customers, which is the route Ernst tried, but they didn't stay on track. Then they can take a different product mix to the same customers, which Ernst also tried and didn't stay on track. Or they can take a new mix of products to a new market."

Ernst may have to think smaller because that's where some of its greatests assets lie, analysts said.

The company, founded in Seattle in 1893, has leases in dozens of convenient sites throughout the Puget Sound, sites significantly closer to dense population areas than those of its competitors.

However, the Ernst stores are smaller than the big warehouse stores operated by competitors. Ernst stores run betwen 30,000 and 60,000 square feet while Eagle and Home Depot operate dozens of stores in excess of 100,000 square feet.

Because Ernst is boxed into smaller, but good locations, the company should emphasize service and convenience over expensive items, said Tricia Reebs, a portfolio manager for Seafirst Investment Counselors.

"A person who's going to do major home remodels is going to go where they have the broadest selection and the lowest price," Reebs said, noting that only the largest stores can offer that. "Whereas if I've got something wrong that needs to be fixed, I'll go where it's convenient."

That's why some have questioned recent moves the company made to introduce a new "homestyles" department which sell home furnishings and appliances.

"I think they tried to change their merchandising concept and people just didn't go along with it," said Jerry Rosso, secretary-treasurer of Julius Rosso Nursery, a Seattle company which is owed $68,000 for merchandise shipped to Ernst.

Rosso said the company, which has been supplying Ernst merchandise for more than a quarter-century, "will have to take a long and hard look at" whether it will continue to do business with Ernst.

"When Pay 'N Pak filed for bankruptcy, we decided to sell to them after reorganization," Rosso said. "Then Pay 'N Pak went out (of business), and we got burned."

Pay 'N Pak, a chain of hardware stores that competed with Ernst, folded four years ago.

Despite criticism surrounding its merchandise mix, Ernst officials said they will emerge from bankruptcy with essentially the same merchandise mix that they have today - including the homestyles department and products geared for full home-improvement projects.

"If you're priced reasonably and have good quality products, you can sell projects (oriented merchandise)," said Jim Fox, Ernst's vice president for marketing.

"Today's actions will help us concentrate on our core group of stores that have been profitable for us historically," Fox said. "We're not going to substantially change."

Jeff Atkin, a retail analyst with Kunath Karren Rinne & Atkin in Seattle, said he understood the criticisms that people had concerning Ernst's ever-changing strategies.

"But it's not as though they had a lot of flexibility," Atkin said.

"Will they survive? Probably," Atkin said. "Will they prosper? That's questionable."

Ironically, Ernst's troubles come during a resurgence in the housing market, particularly for resales.

"Housing turnover is an important factor in our business as people normally fix up a home prior to selling and personalize a home after buying," David Heerensperger, Eagle's chairman, said in a recent letter to shareholders.

"This increases the demand for home-improvement products and services, providing a favorable environment for our business," he added.

In recent weeks, Tukwila-based Eagle reported record sales and earnings. Its stock soared to a two-year high of $17 a share, up $1.50, on news of Ernst's bankruptcy.

Copyright (c) 1996 Seattle Times Company, All Rights Reserved.

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