Payless Cashways undergoes remodeling of its own

KANSAS CITY, Mo. -- Like the 900,000 customers who shop his stores each week, Payless Cashways chief Millard Barron is in fix-it mode.

His crew is waxing floors, painting walls, sprucing up stock and rearranging shelves. It's all part of an effort to turn around Payless Cashways, including a remodeling and remerchandising of Payless' 150 stores, including four in the Oklahoma City area, in the next three years. At stake are almost $2 billion in sales, 10,000 jobs and the investments of thousands of shareholders.

Whether Barron, a former Wal-Mart executive, can pull off the ultimate remodeling job is still to be determined, but some recent signs point to the possibility.

Since Payless returned to its long-ago roots of each store serving both the professional contractor and the project-oriented do-it- yourselfer, it's once again posting profits, increasing same-store sales and making plans to open more stores.

In recent years there were few reasons to celebrate at Payless, once in the top three home improvement retailers and now a distant fifth, and once one of Kansas City's few Fortune 500 companies.

Payless was brought to its knees by an ill-fated management-led buyout in 1988, leaving the retailer choking on $1.3 billion in debt while new competition scorched the landscape. By 1993 Payless was forced to go public again to raise cash to pay down its debt. To try to keep up, Payless management, led by David Stanley, kept hiring consultants, each recommending a different strategy, forcing it to zigzag all over the road.

But it was all to no avail. By 1997, profitability was a thing of the past. On July 21, 1997, at the behest of its bankers, Payless filed for Chapter 11 bankruptcy. Within five months the company was out of bankruptcy, and the old management and board of directors were out the door.

In came Barron and a new board led by Chairman Peter Danis. Under them, Payless has started to turn the corner.

"The theme since Millard Barron came on board hasn't changed," said analyst Deepac Raja of Wiley Bros.-Aintree Capital. "It's just a slow, steady turnaround, and Payless seems to be holding its own, or even better."

As a result, recent months have brought some small -- and some not so small -- celebratory moments. To hail those moments, Barron hung a bell in the lobby of the executive offices. The company isn't hitting any home runs, Barron said, but it is hitting lots of singles and even some doubles.

"You know, I'm an optimistic guy, a `the glass is half full' kind of guy," Barron said. "I bought a bell to celebrate our successes. We ring it when something good happens. Lately, that's been more and more."

To see the future of Payless, take a trip to its store on Marshall Drive in Lenexa.

Gone are the gondolas soaring to the ceiling. Gone is the slow- selling stock. Gone are the mazelike passages, making it impossible to find employees.

Instead, the store is bright, aisles are wide and employees are accessible.

On a recent Monday morning the whir of motorized dollies stacked with merchandise could be heard throughout the store. Everywhere, employees were restocking shelves with fresh merchandise after a busy weekend.

And when they weren't restocking shelves, they were asking lost- looking shoppers if they needed help.

"We didn't hire some new design studio or some national consultant to tell us how to change the store," Barron said. "Instead we talked to our customers and relied on our own expertise."

For instance, the old Payless carried 120 different hammers. But only about half of those were steady sellers, and because Payless carried so many, it could stock only two of each.

That meant the stores were often out of the strong sellers while the weak ones sat there.

Today, the company carries eight each of about 60 different hammers.

It's that methodical analysis of each piece of merchandise, that attention to detail, that has allowed Payless to cull about 20 percent of its stock while increasing sales.

At the same time, the look of the store has changed. Walking in, customers can easily see all the way to the back. White paint brightens the walls. Big black, gold and red signs mark each department.

On opposite sides of the store are higher aisles, each capped with a special promotion. One day it may be 100 heavy-duty, 33-gallon trash bags for $11.49; another an 18-gallon, 6-horsepower Shop Vac for $59.99. No matter what the promotion, each end cap carries the same message in big, bright letters -- PRICED RIGHT!

"There are two essential elements of a store experience," Barron said. One is "the environment, the atmosphere, the ease of shopping ... the availability of associates. And then there's the other piece: the assortment, the breadth of product, the pricing. We're reinventing both at the same time."

Separate from Payless' efforts to rejuvenate the stores' look is its effort to increase sales to the professional contractor and remodeler.

Efforts there are paying off. In its latest quarter Payless reported it earned $1.2 million. More important, sales to professionals at stores open at least one year were up 13 percent. Those same-store sales are regarded as retail's best measure of performance.

In the past, about 53 percent of Payless' annual sales of $2 billion came from the do-it-yourselfers, 47 percent from the pro. That has flipped, Barron said. But he hasn't set a target.

"We'll focus on our program and let that lead us where it takes us," Barron said.

Payless has managed to increase sales to the professional by, again, paying attention to detail. Pros shopping at Payless have their own parking lot, their own door, their own order office. In the past, their order office and door out to the lot were cramped and small.

The new order office is roomy. Best of all, there's a 10-foot-wide automatic sliding door that goes out to the pro parking lot.

"In the past, if they were carrying out long plumbing pipes or trim, it was like wrestling with a bear to get it out the door," Barron said.

The old Payless management had a last-gasp plan. It was called dual path, and it called for some stores in each market to focus specifically on the pro, the others on the do-it-yourselfers. The strategy left analysts scratching their heads.

The per-square-foot cost to convert stores to the dual path was $18 at the low end and as much as $35 at the high end. Payless' new conversion costs are often less than $5 a square foot.

At the same time, the dual-path conversion usually took three months, while the new ones are occurring in 30 days or less.

Using the Lenexa store as a model, albeit a flexible one, Payless expects to convert all 150 of its stores within three years. Thus far, changeover costs are coming in under budget.

"The worst thing you can do is make it look wonderful and great and you get good sales but you're so leveraged with expense that you don't make any money," Barron said.

And while Payless is meeting its goal of growing the company with the pro, it's still bleeding sales on the do-it-yourself side. In the latest quarter, same-store sales to do-it-yourselfers were down almost 8 percent.

So is the Lenexa prototype turning the do-it-yourself sales from south to north?

Grinning, Barron said pro and do-it-yourselfer sales were up at the Lenexa store.

But he wouldn't say by how much.

"I'd like to have six to eight of these with three to six months under my belt before I give you too many particulars, but just read my excitement," Barron said.

Others besides Barron are excited about Payless.

Take investment adviser Jerry Duggan, who is watching the retailer with guarded optimism.

Payless still has many hurdles to overcome, Duggan said, including getting cheaper, more flexible financing.

Once that is done, perhaps within a few weeks, Payless expects to go back on industry-standard payment terms with its vendors, which also should help the company. Already, Payless has told its vendors that it expects such terms and that if they can't comply, the company will look for goods elsewhere.

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