FLEMING: 'NO APOLOGIES' FOR AGGRESSIVE TACTICS

MARK HAMSTRA

DALLAS -- Fleming Cos. here tried to ease concerns about the state of its finances last week after reports that the company was strong-arming its vendors and rumors that its debt ratings could be lowered.

The reports followed on the heels of a shareholder class-action suit filed late last month alleging that Fleming hid weak results at its retail division until recently, causing the price of its stock to be artificially inflated. Fleming denied the allegations and called the lawsuit "baseless and without merit."

In a conference call with investors last week, the company addressed many of the allegations that appeared in a front-page article in the Sept. 5 issue of the Wall Street Journal and in other newswire reports. The Journal article asserted that Fleming was subtracting discounts from its payments to vendors, causing strained relationships with some suppliers and causing others to stop shipments altogether.

Fleming conceded that it has been getting more aggressive in seeking deductions from its payments to vendors, but maintained that it is a standard industry practice and that most of its problems with vendors have been resolved. Mark Hansen, Fleming's chief executive officer, said it is necessary for the company to aggressively seek deductions because vendors routinely overcharge for merchandise.

"When it comes to these industry practices, we make no apologies for being tough negotiators," Hansen said.

The article described strategies Fleming has used to increase the amount that it deducts from vendors' bills, including a "Shared Savings" program introduced last year that automatically chopped 3% off the amount vendors were owed because of cost savings derived through central procurement.

Hansen responded by saying that Fleming was new to central procurement at the time and was seeking to bring its vendors to the bargaining table.

"We were successful in causing negotiations to happen that have caused us to move to a better level of transaction efficiency between us and our vendors," Hansen said.

He also said that most of the problems the company had with its vendors because of the Shared Savings program were resolved last year.

In another deduction program, called "off-shore funding equalization," Fleming was reducing its payments on merchandise in order to provide discounts to its retail customers in Hawaii and the Caribbean.

A spokeswoman for Kellogg, Battle Creek, Mich., told SN that Kellogg's dispute over those charges, which was reported in the Wall Street Journal article, had been "recently resolved, and we consider Fleming to be a valued customer."

Fleming said it currently is at an "impasse" with "less than one-tenth of 1%" of its suppliers, which number "more than 2,000."

Several of the vendors who were mentioned in the Journal article as having had disputes with Fleming wrote letters of support to the company, a Fleming spokesman told SN.

Some of Fleming's retail customers who were contacted by SN said the article made them more wary of the wholesaler, however.

"It sounds pretty unethical to me," said Dennis Painter, president, S.P.D. Markets, Nevada City, Calif. "It puts a bad taste in my mouth. What if I did that to them? What if I started taking deductions from my payments to Fleming?"

Retailers said they were appreciative of Fleming's efforts to haggle for good prices with vendors, but they said such negotiations should be done within a framework of accepted business practice, and, they stressed, any rebates they negotiate from vendors must be passed along to the retailers.

Karen Miller, fixed-income analyst, Bear Stearns, New York, said it was difficult to assess the ramifications of Fleming's tactics without knowing how other wholesalers operate.

"To give them the benefit of the doubt, we don't know the extent that their peers engage in the same practices," she said.

Another analyst, who asked not to be identified, said the article appeared biased against Fleming and noted that there are "traditionally a lot of issues between vendors and retailers."

Fleming also used the conference call to respond to rumors that credit-ratings agencies Moody's and Standard & Poor's were considering lowering their ratings on Fleming's debt. Neal Rider, chief financial officer, Fleming, said he contacted both agencies last Wednesday, and "we believe they are not currently considering a downgrade of our debt."

In a prepared statement, Standard & Poor's said "issues surrounding Fleming's vendor-related deductions have no immediate impact on the company's credit rating or outlook." The agency added that it "has no indication that the deductions are improper or overstated."

However, Miller said she thinks the agencies could soon take a closer look at Fleming's debt ratings.

"Both Moody's and S&P have a negative outlook on Fleming, and I would think that when Fleming comes out with its third-quarter results, if not sooner, the ratings agencies could revisit their thinking on Fleming," she said.

The company previously said that its guidance for second-half earnings would be achievable if the performance of its retail operations returned to prior-year levels, and Rider said that had not happened. He said the company would provide an update on the potential disposition of stores at the end of this month.

Another issue the company addressed the call was the disclosure that Fleming had used sale-leaseback transactions for some of its distribution centers to raise $130 million as part of the funding used to purchase convenience-store distributors Core-Mark International and Head Distributing for about $430 million earlier this year.

Miller of Bear Sterns said the news about the sale-leasebacks caught analysts by surprise. "It just raises an alarm with investors, because they are raising money by selling assets," she said.

Overall, Miller said the conference call left her with several unanswered questions, including what the earnings guidance will be, the magnitude of the discounts that vendors are disputing, the status of Fleming's retail stores and the prospects of the company's relationship with Kmart.