7245 Henry Clay Boulevard
Fay's Inc. was the nation's 12th largest drug-store chain at the end of 1995 and the largest operator of super drug stores in the Northeast. After the sale of an office-supply division in mid 1996, it consisted of 273 discount drug stores, almost all in New York and Pennsylvania, and one liquor store. More than half of Fay's drug stores were situated in four upstate New York metropolitan areas: Albany, Buffalo, Rochester, and Syracuse. They were located in suburban shopping centers with adjacent paved and lighted parking facilities and ranged in size from 12,000 to 16,000 square feet. A mail-order pharmacy-services division marketed mail-order prescription services to prescription-benefit programs.
Fay's announced in August 1996 that it had agreed to be acquired by the J. C. Penney Co. for $285 million in stock. The merger agreement was completed in October of that year and Fay's became a subsidiary of Thrift Drug, making that subsidiary of Penney's the eighth largest drug store chain with over $3 billion in sales.
The Early Years: 1958-76
Fay's originated in 1958, when Henry Panasci and his son, Henry A. Panasci, Jr., both graduates of the University of Buffalo pharmacy school, opened a drug store in Syracuse. Fay's Drug Co. was incorporated in 1966 to acquire the six existing retail outlets and their distribution center in Liverpool, a suburb of Syracuse that also served as company headquarters. By 1969, when the company first offered stock to the public, there were (either in operation or planned for opening prior to June 1970) 11 Fay's Drugs stores in central New York. These were discount drug and general-merchandise stores ranging in size from 8,000 to 35,000 square feet. For the fiscal year 1967, the company had $8.4 million in revenues and net income of $245,309. For 1968 and 1969 revenues were $11.3 million and $13.6 million, respectively, and net income $158,330 and $358,072, respectively.
In 1969 Fay's Drug launched an ambitious expansion program that, by late 1972, had increased the number of stores in operation to 27. All of them were in New York except one in Pennsylvania and were located around the periphery of fast-growing communities, in suburban shopping centers and mini-malls adjacent to supermarkets. A typical store had about 15,000 square feet of space and included a prescription department, health and beauty aids, and a full line of sundries, including toys, automotive products, hardware, housewares, small appliances, sporting goods, stationery, tobacco products, and seasonal items. These self-service outlets were open seven days a week, from about 9 a.m. to 10 p.m., except for the Pennsylvania store, which was closed on Sundays.
Fay's Drug's growth was attributed to a strong senior management team assembled by the junior Panasci and to the company's training and incentive programs for the middle managers who were recruited from pharmacy schools to actually run the stores. A computerized system of financial and management controls included sales, budgets, and inventory control for each store. In fiscal 1972 (ended January 31, 1972), company revenues reached $30.5 million and net income $595,113. Dividends began to be paid out in 1975.
By early 1976 Fay's Drug operated 40 stores of 11,000 to 80,000 square feet. It was filling more than two million prescriptions a year. Prescription departments accounted for about 10 to 11 percent of sales, and Fay's Drug's private-label line to almost five percent. Cash flow had increased to the point where the company was financing about 80 percent of its capital requirements. Its long-term debt was about $2.5 million.
Southern Expansion and Hasty Retreat
Fay's Drug expanded southward during 1978 and 1979 by acquiring the seven Berkeley Drugs stores in Charleston, South Carolina, and the 14 Craft's Drug Stores in Greenville and Spartansburg, South Carolina. Panasci said he was attracted to these two chains because they did 40 percent of their trade in prescribed medicines, compared to Fay's Drug's 19 percent. The company was using this segment as the core of its ever-expanding general-merchandise wares. Another inducement was the chance to move into an area growing in population, unlike stagnant-to-declining New York. Nine more southern stores were opened in 1979. The southern strategy proved a failure, however, because the acquired stores had less than half the selling space of the existing ones, and the lack of a company distribution center in the area mandated reliance on high-priced jobbers. Fay's sold its 31-store southern division to Rite Aid Corp. in 1981 for $10 million.
Fay's Drug also expanded by acquisition in the North in 1979 when it bought 20-unit Key Drug Co. of Rochester, New York, a chain with annual sales of over $29 million, for $10 million in cash. After the disposal of the southern units the company was a more compact operation of 81 stores, all within 150 miles of its Liverpool headquarters and warehouse. Hard goods and miscellaneous general merchandise were accounting for 40 percent of Fay's Drug sales in 1980. Health and beauty aids and stationery, candy, and magazines each accounted for 15 percent. Tobacco products brought in another ten percent and pharmacy the remaining 20 percent. A computerized pharmacy system was installed in early 1982 to facilitate such services as the tracking of prescription usage and the detection of possible drug interaction. It also allowed acceleration of collections from third-party payers.
Revenues in fiscal 1980 (ending January 31, 1980) came to $194 million and net income to $3 million. During the next year sales increased to $243.1 million, but net income fell below $1 million, leading to the sale of the southern division. The company rebounded in fiscal 1982, earning $3.1 million on sales of $238.2 million. By early 1983 Fay's Drug had 92 outlets, including 24, 13, and 12 in the Rochester, Syracuse, and Buffalo metropolitan areas, respectively. Sixty-five percent of its products were coming from the company's warehouse. That year the company's common stock split two for one, and it moved up to the New York Stock Exchange from its previous listing on the American Stock Exchange.
New Acquisitions: 1984-94
In early 1985 Panasci received an award from the Wall Street Transcript, and a securities analyst cited Fay's Drug for being "one of the best in an area of the country that's not particularly known for growth." The company had opened 17 new stores in 1984 and had bought Wheels Discount Auto Supply, a deep-discount New York chain. It had also opened Paper Cutter, a chain in New York and Pennsylvania selling discounted stationery, greeting cards, books, and office and party supplies. During fiscal 1985 the company earned a record $8.7 million on sales of $366.7 million.
Fay's Drug entered the Springfield, Massachusetts, and Hartford, Connecticut, metropolitan areas in 1985 by acquiring eight Genovese drug stores. Forty percent of Fay's drug stores were less than three years old at the end of the year. By the end of 1986 there were 13 Fay's outlets in Massachusetts and Connecticut, but in 1988 nine were sold to Melville Corp. and the others were closed.
Fay's Drug Co. changed its name to Fay's Inc. in 1989 to reflect its diversification into Wheels and Paper Cutter. Later that year there were 190 Fay's Drug stores in New York and Pennsylvania, 26 Wheels stores in upstate New York, and 25 Paper Cutter stores in New York, New Jersey, and Pennsylvania. Panasci's son David was president of the Paper Cutter division. Company revenues were $527 million in fiscal 1989, and net income was $10 million.
In 1991 Fay's purchased the capital stock of Rome, New York-based, 48-store Carls Drug Co., Inc., a company founded in 1939 by Panasci's uncle Carl A. Panasci, from Victory Markets Inc. for $35.5 million. In 1993 it agreed to sell ten drugstore locations in southeastern Pennsylvania to the CVS division of Melville Corp. The company bought the assets of 26 National Auto Supply Stores and four Whitlock Auto Supply Stores from WSR Corp. in 1994, adding them to the Wheels Discount chain. Also in 1994, Fay's completed the purchase of the capital stock of Peterson Drug Co. of Western New York, Inc. That year David H. Panasci was named president and chief operating officer of Fay's, moving him in line to succeed his father, who remained chairman and chief executive officer.
Three-Stage Sellout: 1995-96
Fay's found itself the object of takeover rumors in late 1995, a year in which it lost money for the first time. To fend off unwelcome suitors, the company, which was about 31 percent owned by management and directors, adopted a poison-pill defense in August 1995 to counter what it called "abusive takeover tactics, including attempts to acquire control of the company at an inadequate price." During fiscal 1995 (ending January 28, 1995) the company had passed $1 billion in sales and had earned a record $12.6 million, but in fiscal 1996 (ending January 27, 1996) its sales fell to $973.8 million, and it lost $9.6 million. Fay's problems arose from some underperforming and undersized drug stores and the sharp decline of gross margins due to a higher percentage of sales made through third-party prescription plans. The figures were somewhat misleading because the company took a $4.1 million loss from discontinued operations and a $12.5 million after-tax restructuring.
To restore his business to financial health and raise capital for future operations, Panasci decided to concentrate on drugstore operations and jettison the peripheral businesses. Accordingly, Fay's sold Wheels Discount to Western Auto Supply Co., a wholly owned subsidiary of Sears, Roebuck and Co., in November 1995 for $39 million in cash. It was renamed Parts America. Fay's sold Paper Cutter to Party Stores Holdings Inc. for $14 million in June 1996.
Stripped of its peripheral businesses, Fay's became a more attractive takeover target. According to the terms of its August 1996 agreement with J.C. Penney, its stockholders were to receive $12.75 in tax-free Penney stock for each share of Fay's stock, whereas on June 9, 1996, the day Fay's announced it was engaged in talks to sell the chain to J.C. Penney, its stock closed at $8.625. Among the beneficiaries would be Henry Panasci, who held 2.8 million of the company's 20.9 million shares of common stock, and David Panasci, who held 334,000 shares.
At the end of fiscal 1996 there were 218 Fay's Drug Stores, of which 192 were located in upstate New York, 23 in Pennsylvania, two in Vermont and one in New Hampshire. The company was also responsible for the operation of 55 other drug stores--45 of which were operated under the trade name "Fay's Cornerdrug"&mdashquired from independent owners, and a liquor store. Of the 55 total, 49 were in upstate New York, five in Pennsylvania, and one in Vermont. All stores were being leased. Most ranged in size from 12,000 to 16,000 square feet and were located in suburban shopping centers with adjacent paved and lighted parking facilities.
In addition to PostScript, its mail-order pharmacy-services division, Fay's introduced Optima Pharmacy Services, a pharmacy-benefits management group, in 1994. Optima Pharmacy Services provided administrative and management services to managed-care organizations and other plans and programs paying for prescription drug benefits. It was intended to lower the cost of providing prescription benefits by designing plans, monitoring drug usage, and promoting the use of generic drugs in appropriate situations.
In fiscal 1995 prescription and proprietary drugs accounted for 52 percent of Fay's sales. Health and beauty aids accounted for ten percent, tobacco for six percent, consumer hard goods for six percent, and miscellaneous merchandise for the remaining 26 percent. The company's long-term debt was $75.4 million in October 1995.
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