HARRY'S DELAYS EXPANSION PLANS

ELLIOT ZWIEBACH

ATLANTA -- Harry's Farmer's Market here has deferred plans for four of five new stores this year, and possibly all five, because of operational problems associated with its start-up of expanded support facilities.

Harry's had been gearing up for the expansion of its much-lauded fresh foods concept. The retailer's approach, which includes a mammoth produce presentation and major displays in areas like seafood, meat and bakery, has been considered an industry model and is widely followed for fresh food trends.

The postponement includes the company's anticipated move into Nashville, which may be canceled altogether, said Harry Blazer, president and chief executive officer.

The company's top priority is to return to a positive cash-flow position and profitability before expansion proceeds, he explained. Harry's owns and operates three megastores and two Harry's in a Hurry specialty convenience stores, all of which specialize in perishable food products and gourmet nonperishable foods.

The 6-year-old company announced in January that it anticipated a pretax loss of $4.5 million to $5.5 million for the fourth quarter ended Feb. 2 because of operational problems associated with the start-up of three expanded facilities. Those include the relocation and quadrupling in size of its bakery facility to 55,000 square feet, the tripling in size of its prepared foods operation to 15,000 square feet, and the opening of a new

produce receiving and inspection facility of 50,000 square feet. The company invested approximately $14 million in the three facilities last year, Blazer said. However, they are operating at only 30% to 40% of capacity, he noted in January. "And they will not become a positive contributor until the fixed costs associated with them can be absorbed by larger sales volumes," he said.

Despite its decision to curtail expansion, Harry's said it does not expect that to delay the time frame for its financial recovery.

"After further review, we are confident we can return to profitability without adding new stores," David C. Pattillo, executive vice president and chief financial officer, told SN last week. "We feel we can achieve the same results by focusing on getting to a positive cash-flow level and then profitability without the benefit of new stores. "With that kind of intense focus, we don't want the distraction of going through store openings." Harry's securities were hit by news of the delayed expansion plans. At mid-week last week, after the announcement was issued, the shares were down to $13, which was about a 17% drop from the middle of the prior week.

Pattillo said the company anticipates positive cash flow during the second quarter of 1994 and profitability in the third quarter. It will report its fourth-quarter 1993 results next week. Gary Dennis, a securities analyst with Bradford & Co., Nashville, Tenn., said Harry's decision to forgo store expansion in favor of first solving its operational problems might succeed. "They've apparently had a stronger directive from the board, which suggested that growing the stores will help spread fixed costs and leverage the operation but will make it too easy to overlook the fundamental problems. "Instead of growing out of the problems, the board is saying Harry's ought to fix the problems first and then grow the business so that growth will be profitable. "So this looks like a positive development -- if they can do it." The deferred projects include the following: · The opening of a fourth Harry's Farmer's Market megastore here, which has been postponed until at least next fall and possibly later. "We have decided that the Southlake [Atlanta] store can be more smoothly integrated into our operations if its opening is delayed at least into the fall, which will give us the opportunity to assure that we have overcome all problems in our support operations," Blazer said. However, the opening might be delayed further, he noted. "Completion of that store will be contingent on securing funding from our existing commercial lenders or other financing sources," he explained. · An indefinite postponement, and possible cancellation, of the opening of Harry's fifth megastore -- and its first location outside the Atlanta area -- in Nashville, Tenn. The decision to postpone the Nashville megastore followed a re-evaluation of expansion plans.

The company will explore all options for that site, including sellingit, Blazer said. · An indefinite postponement of plans for three more Harry's in a Hurry specialty convenience stores. According to Blazer, the decision to defer expansion does not reflect any lack of confidence in its store concepts. "Our two existing Harry's in a Hurry stores have met with exceptional initial acceptance and success, and our new megastores have been exceptionally well received. "But we need to match our distribution and manufacturing segments of the business with the successes we have experienced in the retailing segment. "We look forward to spending this year refining our concept, enhancing operations and implementing the efficiencies and controls necessary to resume profitable growth."

The fourth-quarter pretax loss is the result of several factors, said Pattillo. Those factors include an increase in the cost of goods sold due primarily to overproduction, higher labor expense and depreciation levels in food manufacturing; increased personnel costs and $900,000 in amortization of store preopening expenses.