Eaton's Seeks Bankruptcy Protection
It was a swooning September day in 1992, the crabapples just beginning to fall from the trees outside Timothy Eaton Memorial Church, the temperature in the low 20s. Everybody who was anybody in the Toronto Establishment was there. The Bassetts, John and Isabel. The Westons, Galen and Hilary. Hal Jackman, then Ontario's lieutenant governor. St. Clair Balfour, of Southam lineage, in a brown suit, carrying a briefcase. Dick Thomson, head of the Toronto-Dominion Bank.
All had gathered to pay their last respects to Signy Eaton, the matriarch of the Eaton clan, widow of John David who had led the family's mighty retail chain in the halcyon days of the 1950s and 1960s, when the company controlled half of the country's department store sales. Atop the burnished casket lay four long-stemmed pink roses, and in front of the bier sat the four handsome sons in whose hands Signy Eaton had left the family jewels: Fred, John Craig, Thor and George.
Even then, the famously private Eaton clan was combating rumors that the company's retail operations were in dire straits. "Money-losing," whispered critics. Not true, said the company. Last week, the evidence landed at last. Eaton's has not just been losing money, it has been hemorrhaging red ink. Now, the 86-store chain is in disarray and an Ontario court has granted the company bankruptcy protection while it radically restructures. On page 4 of the company's court filing is a simple, yet earth-shaking, declarative sentence. "The applicants are insolvent."
George Eaton leads the way on a rare walk through the corporate headquarters of the Eaton clan, stuck in a corporate tower that rises from the middle of the chain's Eaton Centre in downtown Toronto. Scripted on the glass walls outside the various office sanctuaries are mottoes, homilies, snatches of poetry. "Only those who risk going too far can possibly find out how far one can go," says one, quoting T. S. Eliot. Outside Eaton's own office is written: "All work is God's work. Honor your creator and fulfil yourself. Be the best you can be." The author is George Eaton, chief executive officer, the T. EATON CO.
In this atmosphere, which feels more missionary than entrepreneurial, Eaton does not meet the press easily. He has had some media training recently, an indication that the company has been preparing for this day. The family certainly knew it was coming. Back in the early fall, the company defaulted on a loan with its longtime lender, the TD Bank. Dick Thomson, the TD Bank's CEO, has long sat on the board of the parent company, Eaton's of Canada Ltd., along with the likes of Conrad Black and Doug Bassett. According to Eaton, the TD Bank then extended a "bulge" loan. "They carried us through the fall," he says. But the possibility of seeking bankruptcy protection hung in the air even then.
The problems for the chain are chronic and long term. Market share has shrunk to an anemic 11.4 per cent of department store sales, half that of three-year-old Wal-Mart Canada. The company lost $120 million on a pretax basis last year on revenues of $1.6 billion. The year before that it lost $80 million. Revenues have slid sharply, by $500 million over the past five years. So Eaton's needed a long-range financial commitment from its two chief lenders, the TD Bank and the Bank of Nova Scotia. "It was on a go-forward basis that the [bank plan] was inadequate," says Eaton. "We didn't think the financing package was enough to take us through the next two years." The package offered by the banks was "in the $350-million range." The company was looking for $450 million. Worse, in Eaton's view, was the bank's demand, made just after Christmas, that the company put up its retail inventory as security against the new financing. That would have allowed the banks, which together are owed $160 million, to jump the creditors' queue, ahead of the company's employees and its suppliers. This, Eaton's would not do. "The long-term relationship with the banks would have given the company the last two years," says one bankruptcy lawyer. "Eventually, they run out of patience."
Three weeks ago, says Eaton, he again raised with the banks the possibility of seeking bankruptcy protection. "They said we should try to avoid that," says Eaton of those conversations with the company's lenders. But, he adds, "the banks treated us well, OK? And we had a good relationship with the banks for a long time." In the end, the banks were taken by surprise by the suddenness of last week's move. Charles Scott, Scotiabank's lawyer, said at the time of the court hearing that the banks were caught off guard, and questioned the propriety of a transfer in December of an estimated $10 million from the retail company to the family-controlled parent company, Eaton's of Canada Ltd. Asked about this by Maclean's, Eaton would only say that it was a "regular occurrence."
"Two years ago, it was clear we were in trouble," Eaton adds. He cites three key motivating factors for the company's problems: the incursion into Canada of "big-box" and specialty retailers; the persistent consumer-spending gloom that has refused to dissipate since the last recession; and the company's wrongheaded strategy in 1991 to embrace an "everyday value pricing" strategy. Gone were the famed TransCanada sales. Still, "we felt we could turn it around," says Eaton of the way the company looked two years ago. "The plan was for renovated stores, to go back to a more promotional calendar, to focus on customer service. It was working. But there was not enough time, not enough capital." Last year, the everyday low pricing strategy was, finally, jettisoned. Real estate assets were sold, and the net proceeds pumped into key retail locations to make stores appear "trendier." Now, stores will have to be shuttered, though Eaton will not be more precise than between 10 and 40. "There is insufficient consumer demand to support many [of the company's] stores," the court documents say. "After taking into account the direct and indirect costs of operation, approximately $42 million is lost from the operation of such stores annually." When they are closed, thousands of jobs will disappear from a current staff of more than 15,000. "This is not an easy time," says Eaton. "There will be closures. There will be job losses. Sometimes, you have to go through that to save the core, save the majority."
The shock waves were felt everywhere. "It's scary when you hear announcements like this," says Annette Verschuren, president of Home Depot Canada. "It's part of Canada. It's part of our history." Pollster Angus Reid worries about the impact at the regional level. "There are some cities where Eaton's has been almost like the grain elevator," says Reid, calling the closures to come a "symbolic" loss. A salesclerk at Eaton's in Regina reflected on the stark reality for employees. "I don't think anyone's job is safe," he said. "There's no question there will be some big changes and some stores will close. The mood is pretty sombre, but what do you expect?" In Vancouver, shopper Ita McCann, 64, visits the downtown store twice a month. "We've already lost Woodward's," she said, referring to the family-run department store chain that folded in 1993. "For goodness sake, we don't want to lose Eaton's, too." In Montreal, general manager Raymond Picard handled the news conference there on behalf of the company. He had to answer to the likes of Yoine Goldstein, a Montreal lawyer who represents seven Eaton's creditors, mostly clothing manufacturers that Goldstein says are owed millions of dollars. Goldstein pressed Picard on behalf of suppliers whose payments are already more than 90 days in arrears. "You still accepted millions and millions of dollars of merchandise delivered by suppliers in good faith. What do you plan to do to protect those creditors?" Picard responded that under the restructuring plan, all merchandise delivered from this point forward will be paid in full. Goldstein pressed Picard about merchandise previously delivered. "The restructuring plan will maximize the reimbursement of those debts," said Picard.
Women's fashion manufacturer Peter Nygard used to be Eaton's largest supplier, and he says he is not at all surprised by this latest development. He says he scaled back his business with the company deliberately because he was "totally in disgust with their merchandise strategy. They were running the business with a bunch of accountants instead of people who knew anything about merchandising." Other retailers were working towards closer, and fewer, supplier relationships, says Nygard. But not Eaton's. "There are all sorts of different suppliers who always have to bid against each other. It's like a big communistic, centrally driven system that's confrontational instead of co-operative. And the customer gets confused because you don't stand for anything - everything keeps shifting."
When Nygard speaks of "accountants," he is referring to Tom Reid, who was the company's chief operating officer until last fall, when, according to the company, he took retirement at the age of 55. For years, Reid was the most public management face that the company offered up to the world. Reid was an Eaton's veteran, but came up through the credit end and was not a merchandiser. He still sits on the board of the parent company.
"It just seems they were kind of lurching around," says Dave Brodie, a retail analyst with CIBC Wood Gundy in Toronto. Brodie's community has been keenly interested to see hard numbers out of Eaton's, which, as a private company, they were never compelled to disclose. Brodie was certainly surprised by the size of the losses revealed in the court documents. Those are "humongous" losses, he says. "The company dropped $200 million! Phew."
The company now has a little more than three months to file a so-called plan of arrangement with the court, charting the course for the company's future. In the bank's stead, Eaton's has turned to General Electric Capital Canada Inc. for both a revolving credit line of up to $130 million and a further $425 million in loans to ensure the continuation of the company's vital credit card operation, T. Eaton Acceptance Co. Profits from the credit card operation in 1996 reached $22 million. Thirty-five per cent of store sales are made with Eaton's credit cards, which still bear an interest rate of 28.8 per cent. Eaton's has been most desperate to protect this turf. The company was very late in accepting the credit cards of outsiders, not succumbing to American Express until the mid-1970s and later to Visa and MasterCard. The stores still do not accept debit cards, so popular with Canadian consumers. "We have looked at the debit card, but we have not accepted it," says Eaton. Why not? "For a couple of reasons I don't want to mention."
There is, still, the reticence. As recently as a year and a half ago, Reid and other corporate representatives were saying that the retail operations were making money. Those statements were not true? "No," says Eaton, "those comments were not true." Does that befit the Eaton image? "No."
George Eaton is waiting for his brother J.C., as he calls older sibling John Craig. Fred has arrived. As has Thor. All the brothers need to be together for the photo shoot. This is George's idea. And he has brought in a sprawling group of senior management, too. "The store," he says, meaning the Eaton's stores collectively, "is so much larger than one individual," meaning himself.
But it is George Eaton, almost always referred to as "former racing-car driver George," who runs the company. J.C. is chairman of the parent company, but is not involved in the day-to-day. Fred Eaton used to be, but took his leave to be Canada's high commissioner in London in 1991, and never took back the reins, though he keeps a nicely appointed office in Toronto. Thor Eaton raises thoroughbreds and has dissociated himself from company management, though, like his brothers, he sits on the board.
George Eaton is intensely private and certainly does not come across as a "wildcat," as someone who knew him in his racing days describes him. He has three sons and of his personal life will only say that "the private George Eaton has an extremely fortunate family life."
Eaton has had the misfortune of running the company during its toughest days ever. "When they portion out the share of the blame, I was the CEO and I am the principal responsible person. I don't have trouble with that," he says.
He says he has been buoyed by the show of support across the land, the many suppliers and customers who hope Eaton's will come through this slaughter. But Eaton well knows that if it does make it through, the company will not only be much changed, but may well be under different ownership. There are bound to be suitors now that the company has admitted how severely it is hobbled. The United States' J. C. Penney chain has been a rumored buyer for years. "Virtually everybody will have a look at this in the next few months," says Brodie of CIBC Wood Gundy.
At his news conference last week, Eaton said that the company was not "looking for a buyer right now, but if one showed up it would be irresponsible of us not to talk to bona fides. I think the restructuring will be necessary to make it attractive." In a later interview, Eaton would not say whether the company had ever signed a confidentiality agreement with any interested purchaser. "That's a beat-your-wife question," he says. He does not get philosophical about how utterly strange it would seem to have non-Eatons, particularly American non-Eatons, running the venerable chain. As the interview winds up, Eaton says he would like to say one more thing. "I would like to say come in and shop with us," he says. "We're here. We're ready. If you haven't been in in a while, come in and give us a try." The statement seems rather awkward, like an advertising novice trying out new slogans. But at the same time, it sounds absolutely sincere, so unslick, so unlike advertising. "Good wishes," says Eaton simply, "will not save the day."
Last week was meant to be party week at the flagship Eaton store in downtown Toronto, celebrating the day 20 years ago when John Craig Eaton stood through the opening day, shaking hand after hand of Eaton's customers. But as staff handed out coupons offering up to 40 per cent off, as the orange, pink and purple balloons waffled in the air, as the Eaton's - we want to be your store jingle piped through the newly renovated cosmetics floor, the place was dead as a doornail. The dire financial news did not help the mood. "I've shopped here all my life - 50 years," said one woman. "I know there are other places to go to, but if something ever went wrong with what I bought here I was always able to do something about it." The Eaton's guarantee - "Goods satisfactory or money refunded" - is as synonymous with the Eaton legend as Timothy E.'s bronze statue (rub the toe for good luck). On the weekend, the four brothers mobilized to remind Canadians of that legacy. To Edmonton and Vancouver they went to walk the shop floor. Shake hands. Reassure. To admit at last that Eaton's is down. But to argue that it isn't out.
See also RETAIL TRADE.
EATON FAMILY HOLDINGS Retail
The T. Eaton Co. Ltd. operates 86 department stores, with subsidiary companies in travel, food, and delivery services and drug distribution.
A separate holding, Eaton Credit Corp., owns the T. Eaton Acceptance Co. and Eaton Credit Card Trust.
Eaton's of Canada Ltd. has interests in 15 shopping centres, including 20 per cent of the Toronto Eaton Centre. In November, the company sold its 33-per-cent stake in Vancouver's Pacific Centre, as well as interests in two other regional shopping centres in Montreal and one in Victoria.
The family owns 53 per cent of Toronto-based Baton Broadcasting Inc., the largest single shareholder in the CTV Television Network. Baton, which owns TV stations in every province except Manitoba, Quebec and Newfoundland, last week increased its stake in CTV to 57 per cent from 43 per cent.
Maclean's March 10, 1997