Service Merchandise plans to turn the tide in '95 - Company Profile

Discount Store News, May 1, 1995 by Teresa Andreoli

NASHVILLE, TENN. -- Service Merchandise, the $4 billion specialty hard lines retailer based here, will concentrate on improving sales, service and the entire customer shopping experience in an effort to turnaround disappointing '94 financial results.

At its annual shareholders meeting held here last month, chairman Ray Zimmerman said earnings declined 32% to $56.2 million in 1994 due to the retailer's increased investment in customer service, which is still ongoing.

Sales grew 6.2%, propelling the chain over the $4 billion mark. However, due to competitive pricing pressures, gross margin on that $4.05 billion in net sales declined to 24% from 24.8% in 1993.

Service pumped up the number of people on the selling floor last year, improved out of stock occurrences (especially on fliers and promotions) and promoted its credit card business.

Although the increased payroll contributed to a rise in selling, general and administrative expenses (from 17.7% of net sales in '93 to 18.1% in '94), customer satisfaction with the company improved markedly.

"In 1987, customers gave us 87% approval rating overall. In 1993, that rating dropped to 57%," said Zimmerman. "However, between 1993 and 1994, it jumped up to 68%, but that's still not high enough for us," he said.

"We made a prudent move to cut back in advertising for the first quarter and take a little heat," he said, alluding to a correlation in lower first quarter sales. He expects larger volume in the second and fourth quarters.

Zimmerman also noted that the company improved its debt structure in '94 through refinancing.

The chairman and ceo seemed optimistic that results would improve in '95 even though first quarter earnings were down. He attributed the lag to a 3.3% comp store sales decline, additional store payroll costs and the shift of the Easter holiday from March to April this year.

On the bright side, gross margins stabilized in the first quarter, margins were firmer across most product categories and the chain experienced favorable mix shifts within the hard lines categories.

Zimmerman said Service is also in the midst of a complete analysis of expenses with the aim of adjusting store payrolls so that Service's associates are manning the stores at times of peak customer usage.

"The challenges we face are like the wheels of a stage coach," explained Gary Witkin, the new president and coo who joined the company in November after holding top posts at Saks, Marshall Field and Neiman-Marcus.

The "four wheels' according to Witkin are:

* Merchandising--having the correct product, at the correct price at the correct time;

* Marketing--clarifying how Service differs from the competition, which includes better broadcasting their strengths (since Service sells more fine jewelry and electric razors than anyone, Witkin said):

* Whole Store Environment -- treating customers well and profiting from return business, also more accurately measuring customer flow;

* Efficiencies--bringing profit to the bottom line by lowering the expense ratio.

"The term `catalog showroom' is antiquated and doesn't mean much in today's selling environment," the new president said. "We're a hard lines retailer with an exceptionally powerful marketing tool--our catalog--and a more efficient use of selling floor space than most other retailers."

New store count will hit somewhere between 12 and 14 units, a couple will close and four or five will be replaced, Zimmerman said.

Training will be a priority, esxecially under the new senior vice president, human resources, Robert Eimers. Formerly a vp HR for Sonoco, Eimers joined the 408-unit chain in February.