Corpfocus/22″/mike1st/mark2nd By JASON BOOTH Staff Reporter Smart & Final Inc.’s chairman and chief executive is so confident about the company’s future that he resigned last week. Robert Emmons said he decided to step down after having steered the grocery company through one of its most difficult years. He is being replaced by Ross E. Roeder, a longtime director and food-industry veteran. “It has been a year of the reinvention of Smart & Final,” said Emmons. “At the end of this year I can step aside and say that I have accomplished everything that I set out to do.” Emmons, 64, said he is unsure what he will do next, “possibly something entrepreneurial.” It’s not the first time Emmons has resigned. He was originally CEO of Smart & Final from 1984 to 1993, and is credited with transforming the Los Angeles-based company from a local operation with 80 stores in 1984 into one of the biggest national chains of its kind. But when Emmons first stepped down as CEO in 1993, his successor, Roger M. Laverty, instituted several moves that were ill-fated. So Emmons was called back this year to fix the problems. Smart & Final’s stores offer food, paper and cleaning products in a warehouse-style format. Its customers are primarily restaurants and catering firms, though in recent years the company has also attempted to tap the consumer market. Founded in 1871 in downtown Los Angeles, it operates 220 stores across the Western United States, as well as in Florida and Mexico. Smart & Final’s foray into Florida has been particularly troublesome. “They went into a non-contiguous market and had a load of trouble,” said Andy Spelling, an analyst at A.G. Edwards & Sons in St. Louis. The company plunged feet first into the Florida market in 1996, opening six stores almost simultaneously. By the end of 1997 it had 12 stores in that state. But a weak marketing campaign and tougher-than-expected competition from locally based companies resulted in Smart & Final being forced to close two of its unprofitable Florida outlets earlier this year. Analysts said the company blundered by assuming that the tastes of customers in South Florida would be the same as those in Southern California. “We took our California model and put it into Florida,” said Emmons. “We did not recognize that while there is a large Hispanic population in both areas, the markets are very different. As a result, there was a preference in Florida for products that we just didn’t carry.” In addition to off-target merchandise, expansion was so rapid that the company’s distribution system became overwhelmed. Back in 1994, Smart & Final bought Miami-based food-distribution company Henry Lee Co. But by 1997, that firm’s single warehouse was unable to cope with the demands of the 12 new Smart & Final stores. As a result, operating costs rose and the quality of service suffered. The Florida troubles, combined with lackluster performance by the West Coast stores, has had a direct negative impact on the bottom line. For the third quarter ended Oct 11, the company posted net income of $5.6 million (25 cents per diluted share), compared with $6.8 million (31 cents) for the like period a year earlier. For 1997, Smart & Final posted net income of $6.6 million (30 cents), down from $24.3 million ($1.20 per share) in 1996. While earnings are off from year-earlier levels, they have been steadily improving on a quarter-to-quarter basis. Yet the company’s stock has yet to respond. Smart & Final shares were trading above $24 in mid-1997. However, after a fourth-quarter 1997 net loss of $12.1 million, the share price plunged to about $16. It recovered to the $20 level in March, before plunging to about $10 in the second half of this year, where it remained as of last week. “They diversified too far from their core business,” said one East Coast equity researcher, who asked not to be named because, like many other analysts, he has dropped coverage of the company. “They got into too many things, got into distribution, went to Florida. It was unfortunate because they were a good company.” Since Emmons reassumed the reins at the start of this year, Smart & Final has initiated a number of changes. In Florida, it opened a second distribution center in the Fort Lauderdale area to smooth the flow of goods outside the Miami area. It also adjusted its range of product offerings to appeal to Cuban and South American customers. On the West Coast, Smart & Final has been upgrading its existing stores and has opened 12 Smart & Final Plus superstores that offer a wider range of products, including fresh bakery goods and fresh produce. In May, the company bought 39 United Grocery Cash & Carry stores in the northwestern United States. Emmons said the Cash & Carry stores, which are similar to Smart & Final outlets, could serve as a springboard for eventual expansion into Canada. But don’t expect dramatic improvements overnight, analysts warned. “Its going to be a slow build,” said Spelling. “The problems that Smart & Final has are not going to be solved that quickly.”