Ames focuses on digesting Zayre acquisition - Ames Department Stores Inc - Discount Industry Annual Report: Part 2: Merchandising & Productivity

Discount Store News, July 17, 1989

Ames Focuses on Digesting Zayre Acquisition

ROCKY HILL, Conn. -- Last fall, Ames made what may have been the largest single discount acquisition in history when it purchased Zayre's discount stores for $800 million. The last six months have been spent digesting that huge bite, and to date, the nation's fourth-largest discounter appears to be adapting comfortably.

In the short term, the buyout resulted in a first quarter loss for the company, but Ames president Peter Hollis said in the recent shareholders meeting that he expected profits to return to normal during the third and fourth quarters.

Shortly after the acquisition, sources within the company hinted that the chain's burgeoning specialty division would be allowed to languish so that resources could be spent on cleaning up the Zayre stores. However, expansion of Ames' Crafts & More outlets has actually outpaced plan, and 34 of them are expected to be in place by this fall.

Ames has cooled noticeably on its Office Shop Warehouse concept, which now has seven locations. Speculation is that the home office specialty chain will be put on the block, along with the G.C. Murphy variety and dollar store division, in which McCrory, among others, has shown an interest.

The most important development, though, remains the revamping of Zayre. To date, Ames has successfully cleaned up most of the stores, added new apparel, aligned product mixes to more closely match Ames, restructured field and store organizations, and started the conversion of most Zayre stores to Ames stores.

In September, all Zayre stores and 30 Ames stores will be linked to headquarters and each other by satellite, and front-end scanning, price lookup and other automated functions will be added to all stores over the next year.

That will bring Ames into the big leagues, with K mart, Wal-Mart and Target, and Ames could pass the latter into third place among discounters in the coming year.

For the year ended Jan. 28, 1989, Ames' sales totaled $3.36 billion, up from $2.11 billion a year ago. That sales increase reflects the addition of Zayre results for the fourth quarter, but earnings were probably depressed slightly by Zayre results, although the company said that Zayre was marginally profitable in the fourth quarter.

Despite the drag from Zayre, net earnings last year rose to $47.2 million from $34.2 million in the prior year. Operating income soared to $77.4 million from $57.6 million.

Store count doubled to 678 from 342 (full-line discount stores), and variety store count edged up to 172 from 146, mainly due to the opening of 28 Bargain World Stores. Bargain World is a cross between a variety store and a dollar store.

Gross Margin Rises

Same store sales jumped a healthy 5.8 percent, above industry average, and shrink, a problem since the acquisition of G.C. Murphy, shrank to the industry average of approximately 1.3 percent. Gross margin rose by a full percentage point, due, in part, to the better shrinkage figure. Ames also credits better buying and increased import buying.

The Zayre acquisition also changed Ames from a regional, rural retailer to a near-national, more urban operation. According to Hollis, the access to potentially lucrative markets like southern Florida and Chicago was an important consideration in the purchase, along with the favorable real estate position, access to urban markets, and expansion in existing markets with very little investment.

Significantly, Hollis also mentioned potential use of certain Zayre locations as retail laboratories. In one sense, that means combining retail concepts (like Crafts & More) with Ames stores, but it also means experimenting with methods of competing with Wal-Mart. As one Ames executive noted last year in reference to the continued growth of the Bentonville, Ark.-based discounter: "Wal-Mart isn't just going to stop at some state line."

The Florida Zayre stores will afford Ames the opportunity to experience head-to-head competition before Wal-Mart completes its inevitable invasion of the Northeast, Ames' stronghold. Given the effect on other regional retailers of similar Wal-Mart invasions, this could prove to be a very significant part of the Zayre acquisition.