THREE FIRED VPS SUE DELCHAMPS, EX-CEO

LISA A. TIBBITTS

MOBILE, Ala. -- Three fired Delchamps executives are suing the company and Randy Delchamps, its former president, chairman and chief executive officer, on a number of charges, including alleged mismanagement of company finances and fraud.

In a recent lawsuit filed in the Circuit Court for Mobile County, the executives -- James H. McDonald Jr., the chain's former vice president and general counsel; Roy W. Henderson, former vice president of finance and treasurer, and John D. Foshee, former vice president of real estate -- claimed that Randy Delchamps deliberately lied to the company's board of directors, manipulated sales projections and overlooked an employee's acceptance of bribes from vendors.

The suit also blamed Randy Delchamps for the chain's disappointing sales and earnings. Observers said he raised retail prices in an attempt to lure the upscale shopper, a move that the former executives, who were fired on Feb. 3, said was profitable in the short term but effectively drove away the chain's core customer base: blue-collar workers.

Randy Delchamps resigned in mid-April after six years at the helm and 30 years with the company here. In a statement concerning the resignation, his successor, David W. Morrow, said Randy Delchamps resigned "over a difference of opinion in the running of the company."

Neither Randy Delchamps nor the company could be reached for comment on the lawsuit.

Delchamps' results for the nine months ended April 1 showed a $10 million loss. Sales fell 3% and same-store sales fell 5.8% for the year.

In the suit, the executives alleged that Randy Delchamps told the board during a meeting last July that the company did not monitor sales and earnings on an individual store basis. In fact, that information has been available for some years, the lawsuit stated.

Furthermore, he allegedly told the board the company's Birmingham, Ala., stores were performing as expected when, in reality, they were "losing millions per year," the suit stated.

When the board directed Randy Delchamps to develop a corporate strategic plan last November, he instructed the financial staff to manipulate the financial numbers, according to the executives. Instead of projecting a $3 million loss for fiscal 1996, the plan projected a $6 million profit, the suit stated.

McDonald, Henderson and Foshee also claimed that Jesse A. Lewis, who briefly served as executive vice president and chief operating officer in 1993, was not allowed to investigate his suspicions that a senior executive was taking kickbacks and accepting favors from vendors. The suspected executive was not named but the suit noted he is still with the company.

The suit further charged that Randy Delchamps made major decisions without conducting any financial analysis. For instance, the plaintiffs said, he sold the company's trucking operations, then leased them back, costing the company about $1 million more per year than the previous arrangement.

The executives claimed Randy Delchamps promised to address his own "shortcomings" as a leader if they would work with him to improve the company's operations.

Nevertheless, they were fired "for what Mr. Delchamps perceived as a lack of loyalty to him," according to the lawsuit. The three said the company told them they were simply let go because the restructuring plan called for the pruning of a number of senior management positions.

McDonald, Henderson and Foshee had been with Delchamps for 16 years, 26 years and 13 years, respectively.

They have leveled six complaints against Randy Delchamps as an individual and Delchamps as a corporation for breach of contract, wrongful termination in violation of public policy, promissory fraud and fraudulent suppression. "We don't deny that the allegations are serious," said John D. Saxon, an attorney with Cooper Mitchell Crawford Kuykendale Whatley in Birmingham, who is representing McDonald and Foshee. "[Randy Delchamps] made fraudulent misrepresentations to my clients. [They] very courageously sought to tell the emperor that he had no clothes."

The former executives are not the only ones who have been critical of Randy Delchamps. Some observers familiar with the chain have blamed his "inexperience" for the chain's downward spiral in recent years. And there have been indications that his resignation was expected and even welcomed. By trying to attract the more affluent consumer, Delchamps overlooked its core customer base, according to observers. The new stores built under Randy Delchamps' leadership were too glitzy for its working class markets, they said. And by raising prices, Delchamps was ignoring its traditional positioning as a low-price leader, those observers told SN.

George White, a securities analyst with Gabelli & Co., White Plains, N.Y., whose boss, Mario Gabelli, owns nearly 15% of Delchamps stock, said things deteriorated when Randy Delchamps took the helm after the death of his cousin Fred in 1989, who had run the company. "We knew that there were definitely some internal issues going on within the company that probably diverted their attention away from optimally running the business," White said. "It's definitely a positive that he's stepping down."

In recent months, Delchamps has made some moves to counteract its unsuccessful price increase strategy and reclaim lost market share.

It developed a restructuring plan in February, after experiencing disappointing sales and earnings in three consecutive quarters. The Delchamps Strategy 2000 pledged to streamline operations and improve earnings potential.

The latest move in its restructuring plan was to institute an everyday-low-pricing program shortly before Randy Delchamps resigned.

In spite of the restructuring, "Delchamps isn't large enough to compete with some of the competitors they're going up against" and should consider merging with a bigger company, White said.

Indeed, that has been the strategy for another operator in Delchamps' region: Bruno's, Birmingham, which agreed to be acquired by New York investment firm Kohlberg Kravis Roberts & Co. late last month. Bruno's has 254 stores in six Southeastern states and had 1994 sales of $2.83 billion. Delchamps has 118 supermarkets in four Southeastern states and had 1994 sales of $1.07 billion. KKR officials declined to comment on Delchamps or other future acquisition possibilities.