DVD keeps Musicland from going OOB

Discount Store News, Feb 9, 1998

MINNEAPOLIS -- Even as Nobody Beats the Wiz and a few others struggle in bankruptcy, the one mass merchant music chain that had everybody worried has turned the corner thanks to DVD (digital video disc) and new methods to exploit movies and related products. Musicland Stores Corp., in fact, sold $1 million worth of DVD in a single week just before Christmas.

Capping off a year when the weekly word on the street had the 1,372-store chain headed toward bankruptcy, and certainly dependent on a great holiday season to "get around the bend," Musicland instead set new records in pretax profits and net earnings.

But while video is strong, nobody is claiming video alone can take the credit. In fact, chairman and ceo Jack Eugster cited "strong music product and significant gains in apparel, DVD, and video games" as contributors. And yet there's no escaping such dramatic factors as that sale of $1 million in DVDs in a one-week span from Dec. 14 to 20.

The fact is, Musicland is much more than music. For one thing, unlike any other retailer, it has 409 Suncoast stores that basically sell video and closely related products. And video contributes much in the chain's other storefronts: 722 Sam Goody/Musicland, 157 On Cue, and 68 Media Play Store

It all adds up to net earnings for the year's final quarter of $65.7 million versus a net loss of $92.3 million for the year-ago period that included $40 million for closing 106 stores, 19 of them Media Plays.

The store closings, the most dramatic of many belt tightening steps Musicland has taken, had an adverse effect on total revenue. Sales were down 3.3% to $676.2 million for the fourth quarter ending Dec. 31, and down 2.9% to $1.77 billion for the year.

However, comp sales were up 5.8% for the quarter, even in the mall stores where mass merchants have been feeling lots of pressure. The superstores were up 6.8%, mall units up 5.3%. For the year, comps were up 4.5% with malls pacing the bigger stores up 4.7% to 4.1%.

Significantly, some of the turnaround steps Eugster summarized have to do with basic numbers and financial strain. For example, the chain negotiated its bank group into approving a $50 million term loan to amend the firm's revolving credit facility last June; the company went to a single distribution center, instead of two; SG&A as a percentage of sales were cut by 1.8%.

Not mentioned specifically--but crucial no doubt--was a Dec. 17 news release boasting that Musicland had completely paid down its voluntary accounts, payable standstill amounts with its major vendors, and a permanent reduction in revolver borrowing of $20 million. All of this fueled credit availability during the holiday season.

Maybe the most significant step was Musicland's inventory management in terms of better in-stock positions, redeployment of inventory dollars, and buying more frequently and closer to sales peaks. Inventory levels at yearend were down to $450.4 million from $505.1 million the year before.

But equally important was raising gross margins 2.7% in the important fourth quarter and 1.2% for the year. It achieved this by "altering strategies for merchandise mix, pricing, and promotions," Eugster said.

Just where video fits in energizes Archie Benike, vp of marketing, who credits "title management."

In the past year, Musicland switched to a centralized marketing system, climaxing an 18-month period of belt-tightening and reorganization in nearly every direction. The person who video suppliers have come to know is Craig Thomas, director of video, also known as "movies" marketing. "We like the term movies because we don't rent. Thomas does ["movies"] for all four divisions: Suncoast, Media Play, Sam Goody and On Cue. In the past, each division had their own marketing team somewhat independent of each other," Benike explained.

With one department managing marketing in all four chains, there is a greater consistency--what Benike likes to call "solidarity"--in being able to change strategies quickly and "market titles more strongly depending on which division can capitalize on it most."

Where in times past, and perhaps even now for chains less centralized, there might have been over dependence on the promising near glut of pre-season titles, Musicland was positioned to take advantage of strengths where they counted most, Benike said.

"We were anticipating the fourth quarter to be very strong in hit-driven business when you look at the lineup. Every week there was something there," Benike said. "I think you get into a pattern where every retailer looks at last year and looks at their unit comps to determine the success of it; there was a variety of direct to sell-through titles that appeared week after week. But none of those titles offset `ID4.'"

So the chain took advantage of DVD's incredible popularity, the resurgence of music videos and the strong performance of catalog. "Suncoast has always been a catalog driven concept.

"Music video was a pleasant surprise for us, driven primarily by Hanson," Benike said, noting that exposure on VH1 and MTV has started to kick in as "the growing teen" wants to know more about their favorite artists and reacts strongly to a show by Fleetwood Mac, Hanson or Spice Girls.