Service Merchandise to focus on jewelry and home for holiday - Brief Article - Statistical Data Included

DSN Retailing Today, Nov 20, 2000 by Debbie Howell

NASHVILLE, TENN. -- Service Merchandise has completed its chainwide repositioning to a new, smaller store presentation as it moves into the critical make-or-break holiday season.

If the new strategy, which focuses heavily on jewelry, home goods and gifts, revives the past years' sagging sales, it would be a turning point in the chain's goal to emerge from Chapter 11 bankruptcy in June 2001. The company typically generates about 40% of its revenue in the fourth quarter.

This summer, the chain was in heavy clearance mode as it moved to get rid of product categories, including toys, juvenile, sporting goods, most consumer electronics and indoor furniture, Store box sizes were cut roughly in half to about 18,000 sq. ft. of sales floor with plans to sublease the extra space.

At the end of October, all 219 stores were converted to the new merchandising strategy. However, only 73 stores in prime retail locations received a full remodel with updated fixtures, lighting and signage. Customer reaction to the new store look has been positive, according to the company.

"Customers have had great things to say about it. They like the ease of shopping. The re-format made all the difference. It's a very open-feeling store," said spokeswoman Allison McAfee.

Because the chain has shut down 127 underperforming stores since 1999 and cut 3,000 skus, impact on earnings is difficult to measure. The chain's latest quarterly report for the three months ended July 2, 2000, showed sales down 19.5% to $417.5 million. Comparable store sales in jewelry were up 9.2% and home good comps were down 8.2%, with declines noted in photo, seasonal/outdoor and tabletop/gifts. Although the filing did not specify earnings results, last year the company lost $243.7 million as sales dropped 29.6% to $2.23 billion, again partly due to store closings.

A subsequent 8-K filing showed the losses haven't stopped--for the month ended Oct. 1, 2000, the retailer reported a net loss of $16.3 million on sales of $83.1 million. As of Oct. 1, the retailer, which since April has been operating under a four-year $600 million debtor-in-possession financing agreement, had $182.2 million in cash available, assets of $985.9 million and liabilities of $379.1 million.

Besides winning back shoppers, another key to the chain's success may be its ability at managing real estate through subleases at all of its store sites. A Nashville court handling the bankruptcy case has approved 33 sublease deals.

At each of its stores in 30 states, the chain will erect a wall dividing its space to make about 25,000 sq. ft. available for leasing.

T.J. Maxx has acquired the most leases with 19, while other takers include Best Buy, Office Depot, Bed Bath & Beyond, A.C. Moore, H.H. Gregg and Bally's Total Fitness. McAfee said the majority of the tenants plan to open after December. Service Merchandise is still working to secure deals at its remaining locations.

Meanwhile, the retailer has decided to close stores in San Jose and San Francisco, Calif. The San Jose store closed in October, while the San Francisco store is scheduled to shut down after December.

"They were the only two stores in California. More than anything else it was a logistical issue," said McAfee. "At this time, we don't anticipate closing any more [stores]."

Next year, the chain intends to complete its remodeling program, updating another 70 to 80 stores that received a partial retrofit this year. The remaining 50 to 60 stores will be evaluated for possible replacement.

Another strategy to regain financial stability is leveraging the Web store. Though still a small piece of its overall retail sales, it continues to grow, offering 7,200 skus vs. the estimated 10,000 available in stores. This month the chain installed in-store kiosks where customers can shop from the site, featuring expanded assortments from an estimated 25 vendor partners.

Following its bankruptcy filing in March 1999, the company came up with a business plan that repositions the chain as a specialty retailer of jewelry, giftware and home-related goods. Competition had taken its toll on the chain's former broad-based catalog showroom format and subsequent attempts at becoming an upscale jewelry and home decor retailer.

Despite poor sales performance in many former categories, jewelry has remained its strong suit. With the heightened emphasis on jewelry, Service Merchandise may be in for a pleasant surprise this upcoming holiday shopping season.