10201 Main Street
Stage Stores, Inc. seeks to increase shareholder value by profitably bringing to small towns and communities convenient locations for the purchase of nationally recognized, brand-name products for the entire family. The company is also committed to providing excellent customer service by highly trained sales associates in well-staffed stores.
Houston-based Stage Stores, Inc. (Stage) was founded in 1988 as a private company and went public in 1996. The company is an apparel-retail chain operating mainly in over 600 small towns and communities in the United States. The retail chain, through its wholly owned subsidiary--Specialty Retailers, Inc.--operates primarily under the Stage, Bealls, and Palais Royal trade names to offer nationally recognized, moderately priced brand-name apparel, accessories, fragrances, cosmetics, and footwear for the entire family. Indeed, Stage is America's leading small-town retailer geared to the needs of women, men, and children. By following a strategy based on "thinking big in small-town America," the company enjoys one of the highest operating margins in the apparel-retailing industry.
Stage operates 660 stores in 35 states. More than 85 percent of these stores are located in small towns and communities with populations below 30,000 people and generally range in size from 12,000 to 30,000 selling square feet. The remainder of the company's stores operate in outlying metropolitan areas, mainly in the suburban Houston and Galveston areas. As the only retailer focused on consolidating the fragmented, small-market retailing of branded products, Stage faces limited competition and enjoys favorable store economics, thrives on economies of scale resulting from an expanding store base, commands strong vendor relationships, maintains state-of-the art operating systems, and exercises innovative merchandising and marketing strategies. Stage buys merchandise from a base of over 2,000 vendors. More than 85 percent of fiscal 1997 sales consisted of branded merchandise, including nationally recognized brands such as Levi Strauss, Liz Claiborne, Chaps/Ralph Lauren, Calvin Klein, Guess?, Hanes, Nike, Reebok, and Haggar Apparel. The company's private-label merchandise makes up for the difference. Sales for fiscal 1997 increased 38.2 percent to $1.07 billion from $776.55 million in fiscal 1996.
Beginnings of a New Retail Concept: 1988-92
Stage Stores' operating history dates back to late 1988 when, through a leveraged buyout, the former management team of Palais Royal, Inc., Bain Capital Funds, and Acadia Entities formed a separate company--named Specialty Retailers, Inc. (SRI)&mdashø acquire Palais Royal, a retail chain of 28 stores. Concurrently, SRI acquired Bealls Brothers, Inc. which operated 126 stores. Both Palais Royal and Bealls were family-owned, Houston-based apparel retailers that since the 1920s had built strong regional franchises in the central and southwestern United States. Palais Royal focused mainly on the operation of large stores in metropolitan markets while Bealls's business consisted primarily of smaller stores in rural markets. SRI's management team focused on integrating Palais Royal and Bealls and refined the retail concept that would differentiate the company from both department stores and specialty stores: SRI stores offered more convenience and customer service than were usually found in department stores, provided leading brand names of apparel, and made available a broader assortment of merchandise than could be found in specialty stores.
Palais Royal had relied on automation to improve operating efficiency, as evidenced by its early implementation of an automated personnel scheduling system, electronic point-of-sale cash registers, and a credit-application and behavioral-scoring system. SRI recognized the advances Palais Royal had made in automation and developed a retail concept that relied on efficient operating systems, advanced technology, centralized decision-making, and tight control of operating expenses. In about 18 months SRI substantially completed the consolidation of Bealls's general and administrative functions into those of Palais Royal. Within three years, under-performing Bealls stores had been closed and the financial performance of the remaining Bealls stores had significantly improved.
Expenses of acquisition and consolidation notwithstanding, SRI's net sales increased at a 3.5 percent compound annual rate to $447.14 million in 1991, from $403.9 million in 1988.
According to Kenneth R. Pybus's story in the Houston Business Journal, in 1992 SRI wanted to go public and "sought to raise $192 million in a dual debt and equity offering, but pulled back when the response was less enthusiastic than expected." Jim Marcum, vice-chairman and chief financial officer for Stage Stores, later commented that the filing was made "in anticipation of future growth. Because the future growth really hadn't been executed yet, they just felt you couldn't get the best valuation for the company," so they withdrew the filing. Undaunted, SRI focused on growth through additional acquisitions and consolidations of complementary apparel retailers, improved sales performance of acquired stores, and opened new stores, especially in small rural markets. In June 1992 the company acquired Colorado-based Fashion Bar, Inc., a family-owned business having 71 stores of which approximately 75 percent were comparable to Palais Royal and Bealls stores while the remainder were small specialty stores. Including Fashion Bar, as of June 26, 1992, SRI operated 230 stores in Texas (141 stores), Colorado (66 stores), Oklahoma (nine stores), New Mexico (six stores), Alabama (three stores), California (three stores), and Wyoming (two stores).
When SRI reviewed its operations for the 1988-92 period, it could pinpoint the special features that distinguished Palais Royal and Bealls from other apparel retailers: namely, store size, layout, and location; merchandising strategy; customer service; operating systems and technology; and growth strategy.
The format and locations of the Palais Royal and Bealls stores offered a convenient and efficient shopping experience to customers. These stores, smaller than typical department stores yet larger than most specialty stores, accommodated apparel and accessories for an entire family. The stores were small enough for strategic locations in rural markets--where the company faced limited competition--or in convenient locations in outlying metropolitan areas. The company used a multi-media advertising approach to position its stores as the local destination for fashionable, brand-name merchandise. In the early 1990s consumers in small markets usually had been able to shop for branded merchandise only in distant regional malls. Consequently, SRI's merchandising strategy focused on the traditionally higher-margin merchandise categories of family apparel and accessories.
The company emphasized excellent customer service and promoted its private-label, credit-card program, which in 1991 included over one million active accounts and contributed approximately 60 percent of net sales. Early in its history, Palais Royal had applied highly automated, integrated systems to reduce operating costs in labor-intensive areas, such as, merchandising, credit, personnel management, accounting, and distribution. These proprietary systems increased sales per square foot, reduced markdowns, lowered overhead, increased efficiency, and allowed store personnel to focus on customer service and selling. Furthermore, automation allowed buyers to select and allocate merchandise according to the local demographics and sales trends of the various stores.
The company's successful experience in choosing complementary acquisitions and the timely consolidation of Bealls brought out several facts. Firstly, many family-operated apparel retailers had healthy customer franchises but were under-performing due to lack of advanced systems and buying economies; secondly, gaining market share through acquisitions was generally more economical and offered greater opportunity for rapid growth than opening new stores.
Extending the Small-Market Franchise: 1993-96
In order to eliminate the possibility of having Specialty Retailers, Inc. be identified as only a specialty retail chain, in 1993 SRI's board of directors formed Apparel Retailers, Inc. (ARI), which concurrently became the parent company of SRI. Management recognized the potential of a unique franchise in small markets and committed the company to several initiatives for bringing about the full realization of this potential. These initiatives included: recruitment of a new senior management team; expansion in new markets through store openings and strategic acquisitions; emphasis on customer service and aggressive promotion of ARI's proprietary card; continuing refinement of ARI's concept; and closure of unprofitable stores.
On July 1, 1993, Carl Tooker--who had 25 years of administrative experience in the retail industry--was chosen as ARI president to lead the company's growth; a year later he became chairman and chief executive officer. Tooker succeeded 70-year-old founding President Bernard Fuchs, who retired after having been in the retail industry since 1944.
During 1994, ARI approved The Store Closure Plan that provided for the closure of the 40 under-performing Fashion Bar stores that were part of a 1992 acquisition and did not seem good candidates for consolidation into ARI's evolving small-market strategy. The ARI Board believed that the merchandising strategy and market positions of these stores--located in major regional malls within the Denver area--were not compatible with its overall strategy. Then in late 1994 ARI initiated the series of acquisitions that became the backbone of its expansion into the small-market niche. The company purchased the 45 stores of Beall-Ladymon, Inc. and reopened the stores in the first quarter of 1995 under the Stage name. Where did that name come from? Fashion Bar had operated a small group of stores known as Stage Stores, which already had become part of ARI's operation. In 1996 ARI completed the closure of the other Fashion Bar Stores but kept the Stage name.
The results of the Beall-Ladymon acquisition confirmed the value of ARI's strategy for growth. The acquired stores posted an annual sales increase of 78 percent and a store-contribution margin more than twice that of the previous year. The company also opened 23 new stores. Total ARI sales increased 17.4 percent to $682.62 million in 1995, compared to $581.46 million in 1994. This increase was due in part to increased sales from 23 stores opened during 1994-95. The increase, however, was partially offset by the effects of the Store Closure Plan and the 1995 devaluation of the Mexican peso, which negatively impacted sales at the six Bealls stores located on the Texas/Mexico border.
In keeping with its strategy of controlled geographic growth, ARI completed its second major entry into small markets with the June 1996 purchase of Uhlmans Inc., a privately held retailer with 34 locations in Ohio, Indiana, and Michigan--states where the company previously had no stores. These stores were similar in size and content to ARI's existing stores and were compatible with the company's retail concept. The company opened 35 new stores in the central United States and reported record sales of $776.55 million for 1996.
On October 25, 1996, more than four years after filing--and then withdrawing--an initial public offering (IPO) with the U.S. Securities and Exchange Commission, Apparel Retailers, Inc. changed its name to Stage Stores Inc., completed another IPO by selling 11 million shares of common stock at $16 1/2 per share, and began to trade on the NASDAQ. In conjunction with its stepped-up expansion strategy, Stage Stores applied its small-market retail concept to micromarkets in communities with populations of from 4,000 to 12,000. The company capitalized on its favorable operating experience in scaling its store concept to an appropriate size of less than 12,000 square feet to operate in these small markets that generally had lower levels of competition as well as low labor and occupancy costs.
According to industry analysts David M. Mann and Ethan J. Meyers's December 1997 report on Stage Stores and the retail industry, during the last two decades, many small towns were experiencing "a resurgence as computer and communications technologies allowed professionals to live/work in small towns and improve their quality of life." Furthermore--due to the proliferation of electronic, computer, and print media--customers in small markets were generally as aware of current fashion trends and were as sophisticated as consumers in larger urban centers. National retailers, such as J.C. Penney and Sears, Roebuck & Co., had abandoned small towns in favor of locations in cities and large suburban malls; the majority of independent apparel retailers had been put out of business by the national discount retailers that still operated in small towns, but these discounters did not carry the depth of family-oriented, fashionable brand-name merchandise offered by Stage.
Mann and Meyers's analysis of the regional family apparel sector found that there were 22 companies operating more than 850 stores generating $2.3 billion. Within the relatively short span of less than 10 years, Stage had recognized the latent opportunities in this market, noted the emergence of new lifestyles (for example, career women did not spend as much time shopping for the family as did the women of earlier decades), and developed a retail strategy based on convenient locations where all the family members of small communities could find nationally advertised, branded apparel.
Toward a New Millennium: 1997 and Beyond
With the June 1997 purchase of C.R. Anthony Company (Anthony's), Stage Stores strengthened its position as the dominant branded-apparel retailer in small-town America. Anthony's consisted of 246 family-apparel stores located in small markets in 16 states; the largest concentration of stores was in Texas, Oklahoma, Kansas, and New Mexico. Approximately 87 percent of Anthony's stores were located in small markets and communities having populations generally below 30,000. During the 1997 calendar year, Stage converted 130 of the acquired locations to its format, primarily under the Stage and Bealls trade names; the final group of the other 105 stores were converted and included in Stage's operation by the summer of 1998. The 11 Anthony's stores that were located in overlapping markets were closed.
Acquisition of the Anthony's stores gave Stage the opportunity to accelerate its expansion program in existing markets and to extend its presence in new markets. Both companies benefitted from synergizing their administrative infrastructures, leading, for example, to cost savings on overhead and enhanced opportunities for increased revenue and gross margins. Sales for 1997 increased 38.2 percent to $1.07 billion from $776.55 million in 1996.
As mentioned above, Stage Stores operated under three different store nameplates: Palais Royal, Bealls, and Stage. Both the Stage and the Bealls nameplates identified the company's small-market stores. The company kept the two nameplates because Bealls was so well known in its home states. The Palais Royal nameplate identified the company's larger-market stores located in suburban neighborhoods and high-traffic strip centers, mainly in the Houston and Galveston areas. Although these large stores generated a significant amount of cash, which the company applied mainly to continue expanding into small-market stores, their profit margins were lower than those of the smaller stores. Stage continued to focus its growth primarily on small markets and did not plan significant expansion of the Palais Royal stores.
On March 25, 1998, Stage Stores announced that the Office of the Comptroller of the Currency had granted the company preliminary approval of an application for a credit-card bank charter. Pending further approval by the FDIC and the completion of all remaining conditions, Chief Financial Officer James Marcum stated that the company felt "confident that we will begin to see the economic benefits of the bank by the end of the third quarter." At this period in its history, the company had more than 2 million active credit accounts and proprietary credit-card purchases accounted for approximately 51 percent of the company's sales. Final approval of the bank charter allowed Stage to maximize fees and rates, the majority of which were subject to limits set by each state.
In April 1998 Stage began trading on the New York Stock Exchange. Sales for the first quarter of fiscal 1998 (ending May 2) peaked at a record $272.2 million, a 42.1 percent increase from 1997 first quarter sales of $191.5 million. Shares of stock rose to the $44-$52 price range, compared to the $16 1/2 price per share when the company went public in October 1996.
During fiscal 1997 the company's store count almost doubled, going from 315 stores in 19 states to 606 stores in 24 states as of January 1998. Furthermore, Stage clearly demonstrated that it had the ability and wherewithal to successfully open and convert a significant number of stores. As the 21st century drew near, Stage Stores continued to implement its aggressive small-market growth strategy through organic store openings, strategic acquisitions, and efficient consolidations. In June 1998 the company gained a foothold in the Pacific Northwest through the acquisition of 15 Tri-North Department Stores in Montana, Nevada, Oregon, and Washington. Upon completion of the acquisition, Stage completely remodeled and re-merchandized the stores; they were opened under the Stage name and format in the early fall of 1998. For the near future, Stage identified six viable acquisitions of privately held companies having a total store count of 425. The company's total vision, however, encompassed 1,200 potential U.S. markets that met its criteria for remaining the store of choice for well known, national brand-name family apparel throughout America's small towns and communities.
Principal Subsidiaries: Specialty Retailers, Inc.
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