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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: August 10, 1999
SERVICE MERCHANDISE COMPANY, INC.
(Debtor-in-Possession as of March 27, 1999)
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(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Tennessee 1-9223 62-0816060
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(State or other jurisdiction of incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
</TABLE>
7100 Service Merchandise Boulevard, Brentwood, TN 37027
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 660-6000
Not Applicable
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(Former name or former address, if changed since last report)
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Item 5. Other Events
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Service Merchandise Company, Inc. (the "Company") has filed its 1999
operating plan (the "Operating Plan") as Exhibit 99 to this Current Report
on Form 8-K.
The Company cautions investors or potential investors not to place
undue reliance upon the information contained therein. The Operating Plan is
being made available publicly because such information was made available on a
confidential basis to certain of the Company's creditors for purposes of their
credit analyses. The Company is not obligated to update the Operating Plan to
reflect subsequent events or circumstances. There can be no assurance that, from
the perspective of an investor or potential investor in the Company's
securities, the Operating Plan is complete. The Operating Plan also contains
information which may not be indicative of the Company's financial condition or
operating results for the periods reflected in the Company's financial
statements or in its reports pursuant to the Securities Exchange Act of 1934 and
investors and potential investors in the Company's securities are cautioned to
refer to the Company's filings made pursuant to the Exchange Act. Moreover, the
Operating Plan and other communications from the Company may include
forward-looking statements subject to various assumptions regarding the
Company's operating performance that may not be realized and which are subject
to significant business, economic and competitive uncertainties and
contingencies, including those described therein and in this report, many of
which are beyond the Company's control. Consequently such matters should not be
regarded as a representation or warranty by the Company that such matters will
be realized or are indicative of the Company's financial condition or operating
results for future periods or the periods covered in the Company's reports
pursuant to the Exchange Act. Actual results for such periods may differ
materially from the information contained in the Operating Plan.
The Company's liquidity, capital resources and results of operations
are subject to a number of risks and uncertainties including, but not limited
to, the following: the ability of the Company to continue as a going concern;
the ability of the Company to operate pursuant to the terms of the DIP Facility;
the ability of the Company to operate successfully under a Chapter 11
proceeding; approval of plans and activities by the Bankruptcy Court; risks
associated with operating a business in Chapter 11; the ability of the Company
to create and have approved a reorganization plan in the Chapter 11 Cases;
adverse developments with respect to the Company's liquidity or results of
operations; the ability of the Company to obtain shipments and negotiate terms
with vendors and service providers for current orders; the ability to conduct
inventory liquidation sales to improve liquidity; the ability to develop, fund
and execute an operating plan for the Company; the ability of the Company to
attract and retain key executives and associates; competitive pressures from
other retailers, including specialty retailers and discount stores, which may
affect the nature and viability of the Company's business strategy; trends in
the economy as a whole which may affect consumer confidence and consumer demand
for the types of goods sold by the Company; the ability to maintain gross profit
margins; the seasonal nature of the Company's business (including risks related
to seasonal inventory increases) and the ability of the Company to predict
consumer demand as a whole, as well as
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demand for specific goods; the ability of the Company to attract and retain
customers; costs associated with the shipping, handling and control of inventory
and the Company's ability to optimize its supply chain; potential adverse
publicity; availability and cost of management and labor employed; real estate
occupancy and development costs, including the substantial fixed investment
costs associated with opening, maintaining or closing a Company store; the
potential delisting of the Company's securities and the absence of an active
public trading market; the ability of the Company to provide a private label
credit card; and the ability to effect conversions to new technological systems,
including becoming Year 2000 compliant.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
SERVICE MERCHANDISE COMPANY, INC.
Date: August 10, 1999 By: /s/ C. Steven Moore
------------------------------
C. Steven Moore
Senior Vice President
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EXHIBIT INDEX
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<CAPTION>
<S> <C>
No. Exhibit
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99 Operating Plan
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[SERVICE MERCHANDISE LOGO]
SERVICE MERCHANDISE COMPANY, INC.
1999 OPERATING PLAN
August 5, 1999
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FOREWORD
STABILIZE, STRENGTHEN AND GROW
The 1999 Operating Plan will stabilize the business and lay the foundation
to strengthen and grow the business in 2000 and beyond. The target continuing
EBITDAR for the rolling 12-month period ending April 2, 2000 is $30 million.
This is the operating plan for this 12-month period only. The Company will
separately develop an operating plan for 2000 and 2001 that will provide for its
successful reorganization and exit from Chapter 11.
THE EXECUTIVE COMMITTEE OF SERVICE MERCHANDISE COMPANY, INC.
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<S> <C>
/s/ Sam Cusano /s/ Charles K. Septer, Jr.
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Sam Cusano Charles K. Septer, Jr.
Chief Executive Officer President and Chief Operating Officer
/s/ C. Steven Moore /s/ Thomas L. Garrett, Jr.
- ----------------------------------------------------- -----------------------------------------------------
C. Steven Moore Thomas L. Garrett, Jr.
Chief Administrative Officer and General Counsel Chief Financial Officer
/s/ Gary J. Sease /s/ Kenneth Brame
- ----------------------------------------------------- -----------------------------------------------------
Gary J. Sease Kenneth Brame
Senior Vice President, Logistics Senior Vice President and Chief Information Officer
/s/ Eric A. Kovats
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Eric A. Kovats
Vice President, Store Operations
</TABLE>
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TABLE OF CONTENTS
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<S> <C> <C>
I. INTRODUCTION................................................ 1
Service Merchandise Today................................... 1
1999 Goal - Target Continuing EBITDAR....................... 2
Necessity for Change in 1999................................ 2
How We Will Change in 1999.................................. 3
Summary..................................................... 5
II. RECENT EVENTS............................................... 6
Permanent Management Team................................... 6
Significant Court Actions................................... 7
Store Closings and Successful Liquidation Sales; Asset
Dispositions................................................ 7
Cost Reduction Activities................................... 8
III. STRATEGIC ELEMENTS.......................................... 9
MERCHANDISING............................................... 9
Merchandise Mix............................................ 9
Pricing.................................................... 11
Inventory.................................................. 11
Staying In-Stock........................................... 11
Merchandise Presentation, Tagging and Signage.............. 12
Technology Application: Merchandise Software Enhancements.. 12
Vendor Relations........................................... 12
Consignment Capability..................................... 13
Co-op Advertising.......................................... 13
MARKETING................................................... 14
Service Merchandise's Identity............................. 14
Target Customers........................................... 15
Media Strategy............................................. 16
Media Effectiveness/Efficiencies........................... 18
Creative Process........................................... 19
STORE OPERATIONS............................................ 20
Hardlines.................................................. 20
Jewelry Operations......................................... 21
Cross Selling.............................................. 22
Shrink..................................................... 22
E-COMMERCE AND OTHER DISTRIBUTION CHANNELS.................. 24
Fulfillment Capabilities................................... 24
Internet Business.......................................... 24
Phone Order Business....................................... 25
Corporate Sales............................................ 25
IV. CONCLUSION.................................................. 26
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995............................. 27
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I. INTRODUCTION
SERVICE MERCHANDISE TODAY
As we present this 1999 Operating Plan, we are in the midst of a successful
launch of our Chapter 11 reorganization. Our accomplishments since March include
the following:
- A permanent management team was named.
- Nearly two dozen "first day orders" were entered by the Bankruptcy Court
that enabled the Company to get off to a fast start in its
reorganization.
- The Court approved a $750 million debtor-in-possession facility with
Citibank and BankBoston as lead banks.
- 122 underperforming stores were closed. Liquidation sales were held in
each of those stores, generating approximately $100 million in net
proceeds which surpassed our projections.
- The Company initiated an expense reduction program that will result in
1999 savings of $32 million and annualized savings of approximately $40
million.
- We have re-emphasized value prices in our hardline product offerings
resulting in increased customer counts and sales trending up.
- Our liquidity position dramatically improved, with current cash
availability in excess of $250 million. In addition to our current strong
liquidity position, we are in the process of disposing of our surplus
real estate which should provide additional availability.
- Our exclusive time to file a reorganization plan was extended to February
29, 2000, and the deadline to determine when to assume or reject on-going
store leases was extended to March 31, 2000. Once we have completed a
successful 1999 holiday season, we expect to get these dates extended to
2001 and to exit Chapter 11 consistent with our original timetable given
to our creditors.
The success of these initiatives is due in large part to the spirit of
determination and cooperation that the Company has received from its employees,
its vendors, its lenders, and its other creditors, including landlords and
bondholders. Early in the process, management committed to improve
communications with all of these key constituencies because each constituency is
vital to a successful reorganization. First, the Company, with the support of
the Creditors' Committee and its DIP lenders, won approval of an Employee
Retention Plan designed to let our key employees know how important they are to
our business and provide them incentives to work toward a common goal of
rebuilding the Company. Second, the Company worked with the DIP lenders and the
Creditors' Committee to develop a process by which communications would be open
and productive throughout the bankruptcy process. Thus far, we believe this
process has been effective. Third, vendors have shown their support by returning
to payment terms early in the process. Although not all vendors have returned to
normalized payment terms, the Company is encouraged by this early showing of
support and believes that this 1999 Operating Plan should lead to substantially
all vendors providing normalized payment terms.
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1999 GOAL -- TARGET CONTINUING EBITDAR
We intend to deliver a target continuing EBITDAR(1) of $30 million over the
12 months ending April 2, 2000. We believe that the target is achievable and,
together with our strong liquidity position, evidences that we are positioned to
successfully reorganize and grow the business in 2000 and beyond. Reaching this
target will require many changes to stabilize our business, some subtle and some
more dramatic. This 1999 Operating Plan will explain why we believe the changes
are necessary, why we believe our proposed changes are the right changes, and
how we plan to execute and deliver the target continuing EBITDAR.
NECESSITY FOR CHANGE IN 1999
Over the past several years, the Company has experienced a decline in its
business that ultimately led to a court supervised reorganization. 1999 is not
the first year that the Company has attempted to change. However, until now the
focus of that change was almost exclusively driven by a belief that the
Company's fortunes could be improved by attracting a new customer, specifically
a customer interested in home furnishings. The effort to attract the new home
furnishings customer culminated in 1998 with the interim store format which
included reformatting our stores, offering a new home-focused merchandise mix,
and marketing to a new home furnishings customer. That effort was unsuccessful.
The most important lesson that the Company learned in 1998 is that we
cannot ignore our core customer while we are rebuilding the business. In fact,
it is the core customer that will enable the Company to stabilize, and
ultimately grow, the business. Our core customer represents 21% of our customer
base but accounts for 67% of our total business. This core customer will buy
jewelry and expects value (low prices) along with a broad selection of name
brand merchandise at Service Merchandise rather than trendy home merchandise.
The new home furnishings customer did not materialize, and in order to stabilize
the business in 1999, we must focus on who we are, who our core customer is, and
what that core customer expects from us.
The significance of our core customer is not the only thing we learned from
our 1998 experience. Many of the changes we made in 1998 were good, necessary
changes that can be further developed in 1999. For example, the shopping process
was changed to a more traditional retail format. This change was well received
and will be further enhanced in 1999. Also, there were certain product offerings
that were new to Service Merchandise in 1998 and performed well. In short, we
plan to keep that which worked well while re-committing the Company to
delivering what our core customer expects.
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(1) EBITDAR is defined as earnings before interest, taxes, depreciation,
amortization and restructuring costs (which include Court-approved employee
retention expenses, professional fees, other reorganization costs and GAAP
restructuring charges).
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HOW WE WILL CHANGE IN 1999
Our process of change has begun with the identification of the core values
of Service Merchandise -- values which define Service Merchandise's identity.
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1999 AND BEYOND
CORE VALUE 1998 OFFERING PRESENTATION
<S> <C> <C>
1. Know our customer More affluent families, less price Middle income, high consumer product
sensitive and more fashion/trend orientation, families with average to
oriented above average household income who shop
for value
2. Expectation Trendy home products, margin (not Quality brand name products at value
price) driven prices, supported by a well-advertised
guarantee
3. Broad brand name selection Non-branded home accessories and Dominant branded assortments in key
private label goods emphasized departments including: jewelry, photo,
telephones, luggage, tabletop, kitchen,
furniture; complementary assortment in
traffic driving departments, including
electronics and toys.
4. Clear retail positioning Catalog showroom format transitioned Clear identity as specialty retailer in
to fine jewelry and upscale home key categories of jewelry, photo,
furnishings telephones, luggage, tabletop, kitchen,
furniture; multi-channel delivery:
- Improved core store base
- Mail order
- Internet expansion for growth
5. Clear communication of Inserts -- Emphasized Inserts -- De-emphasized
message Flyers -- Core element Flyers -- Core element
Catalog -- Eliminated Fall Sourcebook -- Re-established
Broadcast -- Complementary Broadcast -- Complementary
</TABLE>
In 1998, in an effort to move away from the catalog showroom format and
attract a new home furnishings customer, Service Merchandise moved away from
several of the core values referenced above. We will now re-emphasize these core
values in a concentrated manner, communicating with clarity that Service
Merchandise once again stands for value. Our Pledge to the Customer: LOW PRICE,
LARGE SELECTION, GUARANTEED SATISFACTION will be imbedded in everything we do
and in everything we communicate.
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THE SERVICE MERCHANDISE PROMISE TO YOU
LOW PRICE
We'll match any competitor's price.
LARGE SELECTION
We offer you the largest selection of high quality fine jewelry and
a broad selection of top brand name goods.
GUARANTEED SATISFACTION
We guarantee that you will be satisfied with our three ways to shop
-- store, phone, online -- or your money back.
America's Leading Jeweler
SERVICE MERCHANDISE
LOW. LARGE. GUARANTEED.
In addition to communicating this Pledge to the Customer, we must deliver
on this pledge by changing the way we deliver products to the customer. We must
price competitively, develop dominant assortments, emphasize selling skills to
our associates, organize and display our products effectively, and improve the
checkout process. Our merchandise mix must meet or exceed our customers'
expectations, while blending traffic generating products within the assortments
that maximize total gross margin dollars.
Building the processes that will enable us to deliver on our Pledge to the
Customer requires not only that we correct our weaknesses, but that we also
exploit our strengths. The most obvious strength we have is our jewelry
franchise which is one of the strongest in the United States, selling more
jewelry per store than any other corporate jewelry chain in the United States,
as demonstrated by the following chart:
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AVERAGE JEWELRY
SALES
JEWELRY RETAILER PER STORE
- ---------------- ---------------
(IN MILLIONS)
<S> <C>
Service Merchandise*............................. $2.7
Sterling......................................... 1.3
Sears............................................ 1.2
Zales............................................ 1.2
J.C. Penney...................................... 0.9
Wal-Mart......................................... 0.8
Finlay Fine Jewelry.............................. 0.8
Target........................................... 0.5
K-Mart........................................... 0.2
</TABLE>
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Source: National Jeweler, June 1, 1999
* Service Merchandise average sales per store increase to $3.1 million when
closed stores are removed.
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Service Merchandise also enjoys significant strength in several key
hardline categories. We have very strong, dominant franchises in a number of
product categories, including:
- Photo
- Telephones
- Luggage
- Outdoor Furniture
- Ready to Assemble Furniture
- Personal Electric Appliances
- Cookware
- Kitchen Appliances
Another strength is our remaining mainstay group of 223 stores.
Particularly in markets where we have critical mass, the stores perform well.
The chart below summarizes 1998 performance in our largest markets where results
were better than average:
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NUMBER AVERAGE AVERAGE STORE
MARKET OF STORES STORE SALES MARGIN DOLLARS
- ------ --------- ------------- --------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C>
Chicago.................................. 20 $10.1 $3.3
New York................................. 10 11.6 3.8
Boston................................... 10 11.4 3.9
Houston.................................. 10 9.0 3.1
Orlando.................................. 9 9.5 3.3
Tampa.................................... 9 9.0 3.2
Dallas................................... 8 10.1 3.5
--- ----- ----
Total Key Markets............ 76 10.1 3.5
--- ----- ----
Total All Markets............ 217 9.4 3.2
=== ===== ====
</TABLE>
Finally, Service Merchandise has a strong mail order fulfillment
capability. In the past, this system has fulfilled in excess of $100 million per
year in sales. Although the Internet is still a small piece of our business, the
strength we already have in fulfillment will be the foundation for further
development of the Company's E-commerce business.
SUMMARY
The above overview is intended to be just that -- an overview. The
remainder of this 1999 Operating Plan will address the specific actions that we
will take in 1999 to stabilize the business and build a solid foundation for
future growth in 2000 and beyond.
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II. RECENT EVENTS
As referenced in the Introduction, the launch of the Company's Chapter 11
reorganization has been very successful. The Company has taken several actions
to stabilize the business in 1999 and build the foundation for growth in the
future. The most significant recent events are the naming of a permanent
management team, significant court actions that enabled the Company to begin the
reorganization process (including the approval of a debtor-in-possession
financing facility), the closing of underperforming stores and associated
inventory liquidation sales, the disposition of surplus real estate, and cost
reduction activities.
PERMANENT MANAGEMENT TEAM
As the Company moved from its effort to restructure the Company
out-of-court to a reorganization under Chapter 11 of the Bankruptcy Code, the
Board of Directors determined that a permanent management team should be
appointed to lead that effort. The premise for naming the permanent management
team was that a focus on the retail business, particularly the retail business
of Service Merchandise, was essential. The Board determined that the most
appropriate team would consist of individuals who know the Company and its
business best. Accordingly, the Board asked Sam Cusano to serve as Chief
Executive Officer, Charles Septer as President and Chief Operating Officer, and
Steve Moore as Chief Administrative Officer.
Mr. Cusano previously served as Executive Vice President and Chief
Financial Officer, and is the person most familiar with the Company's business.
Mr. Septer previously served as Senior Vice President of Jewelry Merchandising
and has been with the Company since 1982. Mr. Septer has been able to maintain a
thriving, growing jewelry business even during the past several years when the
overall business suffered. Mr. Septer will be asked to apply the same principles
to the hardlines business that has made the jewelry business so successful. Mr.
Moore previously served as General Counsel and Secretary and was asked to assume
the additional role of Chief Administrative Officer.
Upon being named to their new roles, the new management team focused first
on solidifying the entire senior management team and improving employee morale.
Already in place were Ken Brame, Senior Vice President and Chief Information
Officer, and Gary Sease, Senior Vice President of Logistics.
Added to the senior management team were Tom Garrett, formerly Vice
President and Treasurer, to the position of Senior Vice President and Chief
Financial Officer, and Eric Kovats, formerly Regional Vice President of Store
Operations, to the position of Vice President of Store Operations. The Company
completed the senior management team by announcing in May that it hired Jerry
Foreman, most recently President and Chief Operating Officer of Retailer
Services, Inc., a subsidiary of Ingram Industries, and prior to that Vice
President of Merchandising at Service Merchandise, to serve as Senior Vice
President, Hardlines Merchandising.
The first order of business for the new management team has been to improve
employee morale. As with all businesses experiencing difficulty, human capital
issues had
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become very challenging. Management launched a proactive communications program
that included meetings with all corporate employees as well as conference calls
with field management. Management committed to establish more frequent and
informative communications with its employees and explain exactly where the
Company stood as it began its reorganization. Management also explained that it
would seek approval of an Employee Retention Plan aimed at identifying key
employees and providing them a financial incentive to stay with the Company and
help rebuild its business.
In May, the Bankruptcy Court approved the Employee Retention Plan for key
employees. An important aspect of this program is that it includes personnel at
the store level. Management realizes that the stores are the lifeline of the
business, and is very pleased that the Creditors' Committee and the Company's
lenders supported that view by endorsing a plan that reached down beyond the
senior level.
SIGNIFICANT COURT ACTIONS
The Court has also entered various orders designed to protect vendors,
including the establishment of specific reclamation claims procedures,
authorization to pay "gap claims," freight and goods in transit charges, and
consignment purchase arrangements. The Court has approved the Company's $750
million debtor-in-possession financing package, extended the period in which the
Company has the exclusive right to file a plan of reorganization to February 29,
2000, and extended the time to assume or reject most leases until at least March
31, 2000.
STORE CLOSINGS AND SUCCESSFUL LIQUIDATION SALES; ASSET DISPOSITIONS
In March, Service Merchandise commenced a store-closing program as part of
its Rationalization Plan. As a result, 122 stores which were not meeting Service
Merchandise's current or prospective requirements for profit and cash generation
were closed.
With the assistance of a team of professionals that included Gordon
Brothers, Ozer Group and Schottenstein/Bernstein, the liquidation of inventory
at the closing stores has generated, net of expenses, approximately $100 million
in cash proceeds. A separate joint venture team of fixture and equipment
liquidators completed the sale of all fixtures within seven days of the
completion of the inventory sales, generating $1 million in additional cash, and
positioning the Company to sell, terminate, market or reject all store leases
within a short period of time following the inventory clearance sales.
In preparation to dispose of the Company's surplus real estate, primarily
resulting from the store closings, DJM Asset Management was retained to conduct
valuations on the surplus real estate portfolio. The Keen Venture, a joint
venture composed of Keen Realty Consultants, Inc., Trammel Crow and Dean &
Associates, was retained to assist in the marketing and disposition of the
properties within the surplus real estate portfolio. A determination of which
leases should be rejected was made upon a review of each property, and thus far
56 leases have been rejected through May.
On June 18, 1999, the Bankruptcy Court entered an order approving Service
Merchandise's bidding procedures for the sale of up to 102 of the remaining
surplus real estate
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properties and the sale of the B.A. Pargh office products business unit. This
process is designed to assure that Service Merchandise receives the maximum
value upon the disposition of the surplus real estate portfolio and the B.A.
Pargh business unit. The real estate auction was held July 8, 1999.
COST REDUCTION ACTIVITIES
To adjust the cost structure or "rightsize" the business to correspond to
the reduction in store count and expedite our return to profitability, Service
Merchandise announced in March, and then immediately implemented, several
significant cost reduction actions. These actions included:
- A corporate office workforce reduction that has resulted, through May, in
a headcount reduction of 226, with an anticipated additional corporate
office headcount reduction in 1999 of 23. These workforce reductions will
result in savings of approximately $7 million in 1999 and approximately
$9 million for a full year.
- The closure of the Dallas, Texas distribution center, completed in May,
resulted in a headcount reduction of 120 jobs and a total savings of
approximately $7 million in 1999 and approximately $11 million on an
annual basis.
- The closure of five regional jewelry repair centers (in Houston, Detroit,
Providence, Pittsburgh, and New Orleans), resulted in a headcount
reduction of 104 jobs and a cost reduction which will generate savings of
approximately $2.5 million in 1999 and approximately $3 million on an
annual basis.
- The closure of the Nashville import CDC and consolidation of that
operation into the Company's Montgomery, New York distribution facility
will result in a total net annual savings of approximately $2 million.
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III. STRATEGIC ELEMENTS
Our stabilization effort features an intense focus on the key elements of our
business: merchandising, marketing, store operations, and E-commerce and other
distribution channels.
Our goal is to stabilize the business in 1999 through a demonstrable
commitment to our core values, to improve comparable store sales and gross
margin dollars, to grow other distribution channels such as mail order and
Internet, and to meet or exceed our customers' expectations of Service
Merchandise. The strategic elements described below are designed to meet these
goals.
MERCHANDISING
We have renewed our commitment to providing the customer what he/she demands
from us -- LOW PRICE, LARGE SELECTION, GUARANTEED SATISFACTION.
In 1999, our merchandising strategy will focus on our core customers and
the products they want and expect to buy at Service Merchandise. This is a
departure from the "top down" strategy employed in 1998 where we developed a
merchandising strategy that sought to attract new, or different, customers. As
we strive to stabilize the business in 1999, the merchandising strategy will be
a "bottoms-up" approach. In other words, we are listening to what our customers
told us in 1998 and will build a merchandise assortment that integrates their
expectations with a stabilized economic formula.
This merchandising strategy is consistent with our Pledge to the Customer:
LOW PRICE, LARGE SELECTION, GUARANTEED SATISFACTION. It is consistent because
our customers have demonstrated by their buying patterns that they expect
Service Merchandise to offer value (low prices and large selection) in a broad
variety of name brand merchandise. In order to truly stand by our guaranteed
satisfaction pledge, we must begin by providing those products that meet and
exceed our customers' expectations.
MERCHANDISE MIX
Hardlines merchandise strategy: The hardlines merchandising strategy
recognizes that our customers expect certain merchandise offerings at Service
Merchandise, such as telephones, kitchen, small appliances, photo, personal
electric appliances, luggage, and floor care. In order to truly be a
"top-of-mind" retailer, we must build dominant assortments in these categories.
Building a dominant assortment will require that we blend each assortment with
entry level price point items (that compete with discounters) and expanded
department/specialty store items at very competitive prices. For example, we may
choose to carry 3 to 4 lower-end coffee makers that have entry level price
points competitive with the discounters, but also carry 10 high-end coffee
makers that carry higher margin rates and are priced below department or
specialty stores. This type of assortment offers both low price and large
selection, something we believe no other retailer offers.
An important component of building dominant assortments is that we must
merchandise our key categories in such a way that the customer knows that we are
in that business. For example, we plan to build a dominant assortment in
telephones because we know our
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customers expect telephones. But if we are to truly build a dominant assortment
in telephones, we must not only carry a broad selection of telephones at varying
price points, we must also carry the peripheral equipment associated with the
telephone business. The customer must know that Service Merchandise is the place
to go for any telephone need, and that we are in the telephone business.
Another critical component of the hardlines merchandising strategy is the
blending of traffic generating products with margin producing products within
every assortment. Again, this is a departure from the 1998 strategy. In 1998,
the plan was to increase both gross margin rate and total gross margin by
weighting our merchandise mix more heavily on unique home products that generate
higher gross margin rates. However, the new customer we were attempting to
attract did not materialize. As a result of our emphasis on becoming a home
store featuring furniture and decorative items, traditional Service Merchandise
product categories such as toys, exercise and electronics that carry lower gross
margin rates, but generate customer traffic, were de-emphasized. The effect of
the 1998 strategy was to increase gross margin rates but decrease customer
traffic and total gross margin dollars. Although the home categories did produce
solid gross margin rates, the increase in rate was not enough to offset the
reduction in total gross margin dollars that resulted from reduced traffic in
the kitchen, toys and electronics categories, all of which were de-emphasized as
part of the 1998 strategy.
Developing the appropriate blend of traffic driving products with margin
producing products will be accomplished by building dominant assortments in
categories our customer expects to find at Service Merchandise. The dominant
assortments will drive customer traffic because there will be an appropriate
blend of value (low priced) products with a large selection of higher priced
margin producing selections.
Jewelry merchandise mix: quality and selection: Our jewelry organization
is a healthy, thriving organization. The 1999 merchandising strategy is a
continuation of the strategy that has worked well for years. The emphasis is on
quality and selection at value price points. Our customers reap the advantages
we have as one of the largest jewelry retailers and the buying and design
capabilities we have through our New York office.
We will continue to use special in-store promotions to spotlight products
that offer value to our customers. We will use bonus buys (highly recognizable
items priced below the competition), advertised through flyers, inserts and
direct mailers as well as special in-store signage, to offer popular items at
great prices. Items that will be featured as bonus buys (i.e., specially priced
promotions offered periodically throughout the year) include 1 to 3 total carat
diamond rings; 1/4 to 1 total carat diamond bracelets; 1 carat solitaire diamond
rings; 1/2 to 1 total carat diamond earrings; and popular brand watches, such as
Seiko. We will also continue to use "green tag promotions" to highlight in-store
promotions of special jewelry offerings. Our intent is to create a special
atmosphere in the store everyday so customers will want to come back to see what
new specials we offer.
We will also continue to offer full jewelry service to our customers, such
as service contracts, jewelry repair, ring sizing, remounting, and special
orders. The full service capability gives our customers confidence in the
quality we offer and allows our customers to rely on Service Merchandise for all
their jewelry needs.
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PRICING
While our pricing strategy will be customized for each product category and
each product within a category based on factors such as whether the product is a
traffic driver or a margin driver and other specific product attributes, we
generally will use the following pricing strategy:
Value Pricing: The regular selling price is competitive, but the product
is frequently put on sale at prices below competitor sale prices. The frequent
sales create a strong motivation for customers to shop frequently to see the
constantly changing sales events. Value pricing is predominately used in our
jewelry business.
Modified Every Day Low Pricing: The regular selling price is set at a
level equivalent to a competitor's sale price. In addition, products are
frequently marked down further as bonus buys or special advertised goods at
prices lower than the competition. The advantage of this strategy is that it
features the value message and creates traffic through special sale events.
Modified every day low pricing is predominately used in our hardlines business.
INVENTORY
A primary objective in our new merchandising strategy is to efficiently
manage our inventory assortments, keep the merchandise selection in the stores
fresh and current, and reduce the amount of merchandise we put on clearance sale
at reduced margins. To accomplish our goals in inventory, we have undertaken
several initiatives:
Comprehensive Assortment Planning and Review Process. The performance of
every item within an assortment is reviewed against department standards and
against the performance of other items. Items not meeting specific standards
will be eliminated from the assortment. This will allow us to maximize the
productivity of our selling space.
Perpetual Inventory Clearance Strategy. Perpetual inventory clearance,
designed to systematically track and monitor sell-through performance and
recommend markdowns, is expected to improve the liquidation of clearance
inventory.
Inventory Evaluation Process. This new methodology will be used to
evaluate the performance of current inventory. The process will assist in the
transitioning of items within an assortment to the clearance strategy. This will
control our inventory levels and protect against a buildup of problem inventory.
Additionally, we will be monitoring the profitability of all product SKUs and
will edit the worst performers out of our product offerings.
STAYING IN-STOCK
Several steps are being taken to minimize frustrating out-of-stock
experiences in hardlines: merchandising and logistics systems are being geared
to improve in-stock positions, buyers are using new assortment planning tools to
assess more accurately potential demand for individual products, and our
merchandise replenishment system is being improved to provide better data on
product sell-through, helping our buyers to react to popular products and
helping our warehouses to restock stores quickly.
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<PAGE> 15
Our jewelry operations enjoy a state-of-the-art jewelry replenishment
system. This proprietary on-line system automatically tracks jewelry purchases
at each of our stores, and gives us a competitive advantage by allowing us to
stock our stores from one central facility in New York. In response to a sale at
one of our stores, a replacement item is picked out of the central inventory and
sent to that store. A jewelry item purchased from a store in the morning can be
picked from inventory in our New York jewelry center the same day and sent to
the store, in some cases by the following day. By not having to keep on hand
inventories at each store our inventory turns are among the highest in the
retail jewelry industry.
MERCHANDISE PRESENTATION, TAGGING AND SIGNAGE
The focus on merchandising will also include improvements to the visual
presentation. The theme will be to create a visual presentation that emphasizes
the availability of quality brand names at affordable prices at Service
Merchandise. Each department will be designed to make a department "statement"
of value as well as to highlight the breadth and depth of selection and feature
new products in prominent areas.
The merchandise visual presentation will be complemented with new interior
signage, bolder tags and brighter colors. All aspects of store signage are being
reviewed for ways to improve the sign placement and appearance, and to make
shopping easier for the customer. A consistent signage program will be
implemented so that advertisements are properly supported in all stores and that
the stores are visually consistent. In addition, system changes are being
implemented to improve the efficiency of the printing and posting of new tags.
Management will review a summary of all price changes to control unnecessary
retagging.
TECHNOLOGY APPLICATION: MERCHANDISE SOFTWARE ENHANCEMENTS
Several uses of technology are being used to plan and analyze merchandise
performance, including our "Decision Master" data warehouse and improved use of
the "Arthur" planning tool. To assist in assortment planning and planogramming
(the physical layout of shelves, displays and merchandise) and to provide square
foot productivity analytics, we will be implementing a software tool called
MarketMAX. MarketMAX provides us the ability to link and integrate selling space
to merchandising assortments and help analyze and plan space requirements by
combining data relating to historical sales, plans, space and product
information into one central database, which can be easily accessed.
VENDOR RELATIONS
Re-establishing a partnership with each of our key vendors in which both
parties benefit through greater profitability is critical to our long-term
success. The straining of vendor relationships is a natural result of the
bankruptcy process and the out-of-court restructuring that was undertaken
earlier this year. Now we must act to increase our vendors' confidence and
actively enroll them in our vision of the future, to find mutually beneficial
ways to cooperate. We are aggressively pursuing vendor support in the form of
pricing that reflects quantity buying power; a return to normalized payment
terms, discounts
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and allowances; and credit limits linked to anticipated order volumes. The
liquidity provided pursuant to the DIP Facility should provide significant
support for credit terms. It is hoped that these improved vendor relations will
also result in normalized levels of vendor "co-op" or cooperative advertising
spending.
CONSIGNMENT CAPABILITY
The DIP Facility permits consignment inventory arrangements to be
established apart from the DIP lenders' security interests. We plan on expanding
these arrangements where mutual interest provides opportunity, especially in
certain jewelry areas, and a dedicated consignment proceeds bank account has
been established with Citibank for this purpose. This opportunity will provide
us with additional liquidity without sacrificing either sales or margin, while
providing vendors the security of retaining title to their products until sold.
CO-OP ADVERTISING
Vendor participation will be sought for "co-op" advertising spending across
all targeted advertising media in the third and fourth quarters. The goal is to
have co-op advertising at similar proportions to previous years, although we
anticipate a slight reduction in total co-op participation as compared to prior
years. It is critical to sustain this form of vendor support.
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<PAGE> 17
MARKETING
All communications will be geared to the consistent theme
of our Pledge to the Customer: LOW. LARGE. GUARANTEED.
Our marketing objective is to reinforce and build a clarity of
understanding of Service Merchandise's core values, or what we stand for. The
Service Merchandise Pledge to the Customer: LOW. LARGE. GUARANTEED. -- low
prices, large selection, guaranteed satisfaction - must crystallize into a
well-recognized Service Merchandise identity resulting in higher traffic per
advertising dollar. In so doing, we will prompt existing customers to increase
the frequency of their visits and the number of purchases they make, and compel
lapsed and new customers to try Service Merchandise.
The core values of low price and guaranteed satisfaction, while important,
do not provide a true competitive differentiation. Instead, they stand for the
point of entry that Service Merchandise must offer to meet customer expectations
on a competitive basis. On the other hand, the core value of large selection
provides a real point of difference from any competitor due to the depth and
breadth of the dual assortment of jewelry and top brand hardlines from which the
customer may choose. No other retailer has an equivalent offer. This story will
be told with the positioning line: "NO PLACE BUT SERVICE MERCHANDISE" as
consumer branding language. Our fall campaign will, for the first time, sell
Service Merchandise in its entirety - that is, a specialty retailer focused on
jewelry, home and gift merchandise - instead of featuring only jewelry or
selected departments, categories or products.
To understand fully Service Merchandise's marketing goals in 1999, it is
necessary to understand who we are, who our customer is, what our customer wants
and expects, and what our marketing programs of the past have produced. These
elements will be discussed as the particular aspects of the 1999 marketing plan
are reviewed.
SERVICE MERCHANDISE'S IDENTITY
Defining the Service Merchandise identity is best accomplished through
understanding who our customers are and what they want and expect from us. In
defining our core values, a lot of attention was given to analyzing our
customers using our 26 million household database and other sophisticated
research sources. This analytic process helped us develop our core values,
described in the Introduction to this 1999 Operating Plan, and ultimately our
Pledge to the Customer: LOW. LARGE. GUARANTEED. We found, in short, that our
customer wants and expects low prices on a broad selection of name brand
merchandise. This was not the message we delivered in 1998. In 1998, the
marketing plan supported the business directive to attract a new home
furnishings customer that was more affluent and not as focused on low prices.
The strategy failed because in the process of trying to attract a new customer
we lost the focus on what the core Service Merchandise customer really wants.
Accordingly, in 1999 we will return to a focus on our customer by
emphasizing and delivering low prices, large selections and guaranteed
satisfaction.
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<PAGE> 18
TARGET CUSTOMERS
Purchase behavior profiles of the 26 million household Service Merchandise
database demonstrate that Service Merchandise customers and prospects fall into
four general categories:
- Best Current Customers: These customers have made a purchase within
the past 12 months, making frequent store visits and multiple
purchases of both hardlines and jewelry products. These customers,
5.3 million in 1998, comprise 20% of all customers in the database
but account for 67% of our total gross margin.
- Other Current Customers: These customers have also made a purchase
with the past 12 months but do not shop at Service Merchandise as
frequently and tend to purchase just one or two items per visit. In
1998, there were 6.5 million customers in this category.
- Lapsed Customers: This segment has shopped Service Merchandise
within the past three years but has not made a purchase in the past
12 months.
- Prospects: These are households that never shopped at Service
Merchandise or that have not shopped us in the past three years.
The following table shows the demographic composition of our customers:
<TABLE>
<S> <C>
Gender:
Male............... 43% (.91 times as likely to be male as
national average)
Female............. 57% (1.1 times as likely to be a female as
national average)
Household Income...... $59,500
Marital Status........ 68% married (2 times more likely to be
married than national average)
Children.............. 1.8 children in the households with children
(2.4 times more likely to have children than
national average)
Adults................ 52% have 3 or more adults in the household
(1.6 times more likely to have 3+ adults
than national average)
Education............. 28% graduated college (1.3 times more likely
to be a college graduate than national
average)
Residence............. 60% homeowners (2.5 times more likely to be
a homeowner than national average)
45% in their home for 5 years or less (1.7
times more likely to be in their homes
for 5 years or less than national
average)
</TABLE>
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<PAGE> 19
These categories represent the target customer that we will pursue in 1999.
Clearly, the "Best Current Customer" is very valuable, but it must be recognized
that there is tremendous turnover even in this category. Our research shows that
the "Best Current Customer" category changes by as much as 80% per year. This
tells us that the strategy of going after new customers is not wrong, in fact it
is necessary, but we must focus on our demographic. In other words, when we
refer to core customers, we are not referring to an exact group of existing
customers but to a behavior and demographic profile of who our best customers
are most likely to be. Our marketing plan will seek out customers who fit the
demographic profile of our best, or core, customers.
With respect to the "Other Current Customer" category, we will again focus
on our demographic profile in an effort to persuade these customers to become
better customers and move into the "Best Current Customer" classification. We
will work to improve the profitability of this group by promoting cross-shopping
behavior, especially converting hardlines-only customers into jewelry customers.
Those in the "Lapsed Customer" category offer a tremendous opportunity.
Marketing to this group is a much more efficient use of advertising dollars
because, unlike those who have never shopped Service Merchandise, these
customers know who we are, where we are located, and what we offered in the
past. We will target the best of the "Lapsed Customers" (lapsed customers who
purchased approximately $300 and made multiple store visits per year) in an
effort to regain their business and move them into either the "Best Current
Customer" or "Other Current Customer" categories by marketing to their specific
needs and purchase behavior captured in our database.
Of course, we also want to attract new customers, and have a plan to do so.
Our plan, however, is centered on our core values and on those of our core
customer. In seeking new customers we are not trying to create a new brand (as
we did in 1998). Instead, we are presenting the Service Merchandise brand our
customers want and expect: LOW. LARGE. GUARANTEED. Our new advertising mix with
greater emphasis on broadcast will help us to reach these new customers.
MEDIA STRATEGY
The 1999 fall advertising campaign is based upon a fully integrated media
mix that utilizes a wide variety of vehicles to reach the maximum number of all
customer classifications as frequently as possible. There are several key
differences in the media mix versus prior years, but the primary difference is
frequency - we will utilize one of our primary media vehicles every other week,
with additional smaller, targeted pieces to drive home our message of LOW.
LARGE. GUARANTEED. Although gross advertising expense will decrease, because the
number of stores has decreased, advertising as a percent of sales is expected to
increase.
The components of the media strategy are set forth below:
TV: Television will be used as an "umbrella" to build top-of-mind Service
Merchandise brand awareness and reinforce the print campaign and prospect for
new customers. In 1999 we will reallocate our marketing budget to use television
covering more than 60% of
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<PAGE> 20
our stores versus only 30% of the stores in 1998. A second change in our
television strategy is in the product message. In the past, television has been
used to market either jewelry or hardlines, but never both. In some respects, we
felt that the customer might be confused by the concept of having two stores
within a store, one jewelry and one hardlines, and might have a negative effect
on jewelry sales. In 1999, our television advertisements will go after both the
jewelry and the hardlines customer with a message that champions who we are - a
merchant that offers a large selection of both product classifications. Building
on the LOW. LARGE. GUARANTEED. promise, we will use a theme of "NO PLACE BUT
SERVICE MERCHANDISE."
Radio: For the first time, Service Merchandise will utilize radio as an
important part of its marketing campaign. Radio's role in the broadcast campaign
will be event driven; i.e. it will be used as a traffic driver and a complement
to television and print. Again, it will focus on the LOW. LARGE. GUARANTEED.
promise with a theme of "NO PLACE BUT SERVICE MERCHANDISE."
Seasonal Sourcebook: One of Service Merchandise's unique competitive
advantages is its customer information collected at the point of sale. Because
of our database, print has historically been the primary vehicle for marketing,
and while we recognize the need to integrate broadcast media and are taking
steps to do just that, print will again play a dominant role in our fall
campaign. A key part of the print strategy is the use of a fall reference book,
or Sourcebook. The Sourcebook is larger and more substantial than flyers but is
significantly smaller and less costly than the catalog distributed in prior
years. We believe that adding a more substantial seasonal print tool in the form
of the Sourcebook is important for several reasons, including:
- because it is larger and more substantial than our flyers, it will help
send the message to our customer that we are still in the market and are
here to stay;
- it provides a reference tool for pre-shopping, either in the stores or by
mail order or the Internet; and
- it serves as a means of selecting gifts during the holiday season.
In addition to the above reasons, an analysis of our sales trends, while
declining over the past several years, shows a sharp decline in 1998 when there
was no reference tool similar to the Sourcebook.
In evaluating our disappointing 1998 results, it is important to realize
that elimination of the catalog had an adverse (although difficult to quantify)
effect on sales. By using a Sourcebook rather than a traditional catalog, we
have an opportunity to regain a portion of what we lost while spending
substantially less, but achieving a higher per store penetration than before.
There are significant differences between the traditional catalog and the
Sourcebook:
- the Sourcebook is only a part of our integrated marketing campaign
whereas the catalog was the predominant marketing tool;
- the traditional catalog was designed to support the catalog showroom
format. We are not a catalog showroom and the Sourcebook will not be
designed to support that format. It is a seasonal tool to support
seasonal business;
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<PAGE> 21
- the traditional catalog consisted of approximately 600 pages whereas the
Sourcebook will consist of approximately 260 pages;
- we believe that the Sourcebook is something our customers want and
something that fits well into our integrated media strategy;
- the Sourcebook will be substantially less costly than the traditional
catalog; and
- the shorter duration of the Sourcebook life (compared with prior year
catalogs) provides greater flexibility with product pricing beyond the
fall season.
Flyers: Mailed flyers, both general and specialty, will be used to
generate sales of specific items at promotional prices, and will be directed to
those customers predicted to provide the best response in terms of purchasing.
The flyer media strategy is one that we know very well and is more easily
measurable in terms of effectiveness.
Newspaper/Inserts: In 1998, we placed increased emphasis on inserts as a
means to prospect for new customers. Although it will still be used in 1999,
inserts will play a lesser role in the overall media strategy. Inserts will
exclusively revolve around the holidays as opposed to 1998 when inserts were
used as a constant means of prospecting. The use of inserts during the holidays
will have the purpose of disseminating the information provided in our flyers
beyond those customers/prospects who received mailed flyers.
MEDIA EFFECTIVENESS/EFFICIENCIES
Whether in broad-based media such as television and radio, or in narrowcast
media such as mailed fliers, the target is defined as precisely as possible to
ensure maximum efficiencies. In the case of broadcast media, target-rating
points are planned and purchased for adults, aged 25-54, with a skew to females.
Individual markets are ranked according to a brand development index that
incorporates as many critical variables as possible to prioritize all markets in
terms of cost-effectiveness.
In direct mail, we use a general response model to rank households in the
Service Merchandise database by their likely propensity to respond to both
general and specialty publications. A more sophisticated tool, automated
modeling software, will be in place for the second half of 1999 that will create
a targeting model for each individual publication.
Ongoing measurement of all advertising is a critical component of our
marketing plan and its execution. The basic methodology is to determine the
incremental impact of each effort in terms of sales and gross margin. This
incremental difference is based upon an advertised segment or market (test)
versus a non-advertised segment or market (control). When a test/control model
is not available (e.g., in the case of a storewide promotion) we use a sales
trend analysis to project incremental results. In both cases, the measured
incremental gross margin is compared to the cost of the advertising to determine
the return on investment.
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CREATIVE PROCESS
Our creative process has been streamlined so that it can be effectively
managed and the message can be kept clear and focused. The print creative work
has been outsourced to provide structure and resources for the process in a
cost-effective way. One agency, The Haggin Group, handles all hardlines work,
and a second agency, The Jay Lazar Agency, handles all jewelry work. Focusing
the print work in just two agencies allows them to be integrated with the
marketing and merchandising team and to be fully accountable. It will also
enable us to reduce internal marketing costs and reduce head count. This
integration and accountability has stabilized the advertising production
process, allowing for a focused, consistent message emphasizing the Pledge to
the Customer through all print media efforts. Broadcast advertising is assigned
to a third agency, Lighton Colman Agency, which works in close partnership with
the two print agencies.
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STORE OPERATIONS
We will improve our employees' selling skills and the customers' shopping
experience.
Store operations are a critical component of this 1999 Operating Plan and a
key focus of our efforts to stabilize the business. We recognize that we must
leverage our core competencies in jewelry and hardlines and deliver on our
Pledge to the Customer so that Service Merchandise is once again a compelling
shopping proposition for the customer. The primary deliverables are to create a
sales-driven operations group and to provide a shopping experience that enhances
customer satisfaction. Our key objective is to increase comparable store sales,
improve our levels of customer satisfaction and meet or exceed customer
expectations.
HARDLINES
Sales Personnel: In the past, Service Merchandise has geared its
hardlines labor pool to be warehouse-oriented, consistent with our former
catalog showroom format. During 1998, we changed the store format to a
self-service retail environment, which required a labor force that previously
had been responsible for operational tasks such as restocking and tagging to
become more versatile. This met with mixed success, and we are currently
reorganizing our store team to focus on selling product to complete our
transition into a successful mainstream retailer. Given the success of our
jewelry team, which has historically been a sales-driven group, as well as our
recent success with selling supplemental service agreements, we are confident of
our ability to make this transition. We have found that, when properly trained,
motivated and incentivized, store employees focus very effectively on the sales
of specific products by applying the skill sets that enhance jewelry and
supplemental warranties sales. Significant training efforts are designed to
deliver employee capability in this area - including a comprehensive roll-out of
an easy to implement, Three-Step Selling program for associates and management
(the three steps are Greeting the Customer, Building the Sale, and Closing the
Sale).
Organizational Improvements: In order to accomplish these operational
goals in hardlines, Service Merchandise has undergone a reorganization to
realign operational duties that previously were handled by the store manager or
other associates on an as-delegated basis. The purpose of the store
reorganization is to create a focused, sales-oriented team.
- The newly created position of Operations Manager will be responsible for
operational issues, specifically addressing product tagging and in-stock
issues, as well as certain matters with respect to shrink and inventory
cycle counts.
- The creation of targeted selling positions in the organization will
facilitate the creation of a store team that focuses on selling products.
Specifically, the creation of a Kitchen Sales Lead, Home Sales Lead,
Electronics Sales Lead and Seasonal Sales Lead should focus on meeting or
exceeding customer expectations rather than merely stocking and tagging
and order taking.
This redeployment of store labor to focus on selling and key aspects of
operations was accomplished with an overall neutral cost impact. An elimination
of certain store managerial positions increased the amount available for payment
to hourly associates, which should
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<PAGE> 24
deliver an improvement in certain goal areas, including level of customer
service, merchandise replenishment, tagging and merchandise presentation.
Customer Convenience/Checkout Process: A recurring issue relating to
customer convenience and satisfaction is the speed of the checkout process.
Certainly, this has been a challenge for Service Merchandise, in part because
the checkout process was designed to cover such a wide range of transactions. In
fact, one of our strengths is that at the point of sale, customers can be
provided with alternative items, supplemental warranties, back-order
information, home shipping, gift registry services, special orders and lay away
information. Also, at the point of checkout, customer information has been
obtained to create and constantly update our 26 million household database.
We have replaced computers in each store and will replace the signature
capture equipment at each register. The new equipment will speed credit card
transactions and improve overall checkout times by between 15 to 90 seconds per
transaction.
Customer Convenience/Out-of-Stocks: Our core value of guaranteed customer
satisfaction means we must reduce our out-of-stock occurrences. The former
Service Merchandise inventory management format led to higher out-of-stock
occurrences than is acceptable. Service Merchandise is implementing numerous
changes to minimize the inconvenience and capitalize on the situation. If the
store is out-of-stock in an advertised item, an alternative will be suggested.
If the customer doesn't want the alternative product, the store will offer to
obtain the out-of-stock product and send it to the customer's home, free of
shipping charges. While we will incur freight charges, the result will be a
successful sale (albeit at a lower margin) and a satisfied customer, a process
which provides a good competitive advantage.
JEWELRY OPERATIONS
Jewelry operations have historically been much more sales-driven than
hardlines, and over the years, even while hardline sales were trending down,
jewelry sales performed well. We will continue to build upon the jewelry sales
focus going forward. The store jewelry manager will create unique events and
daily specials to create excitement for jewelry customers and to cross-sell to
hardline customers.
Sale Methodology: The jewelry team has developed a concentrated approach
to selling jewelry. This starts with creating an attractive and functional
atmosphere that is conducive to buying jewelry. Although it sounds basic, the
sale starts with greeting the customer. It is important to establish trust with
the customer at the very beginning while finding out the customer's wants or
needs. The process continues with the jewelry associate showing jewelry to the
customer in a professional manner, pointing out features and special qualities.
During this process, the jewelry associate listens to the customer to be able to
discern the customer's desire to buy. When the customer does show a desire to
buy, the jewelry associate closes the sale by confirming that the selection is a
good one and complimenting the buying decision. The jewelry associate will also
immediately show companion items to include in the sale. If the customer does
not indicate a desire to buy, then the jewelry associate will turn the customer
over to another associate to complete the transaction. Jewelry Plus is offered
to the customer as a way of enhancing a quality purchase
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<PAGE> 25
in terms of cleaning and maintenance as well as an insurance against defects.
Jewelry customers are invited to the next jewelry special event and their
purchase information is entered into the Clientele Book, creating a feeling of
exclusivity for the customer and allowing us to contact the customer with
information about future special events and special product opportunities.
Motivating Jewelry Associates: A key element in building a successful
selling team is motivating the jewelry associates. We provide on-going sales and
product knowledge training so that the associate is confident. We also provide
constant feedback and critique for positive reinforcement and improvement,
showing that effort matters and is noticed. The feedback is also formalized in
monthly reviews making jewelry associates accountable for their successes and
their commitments for the upcoming month. And most importantly, the jewelry team
recognizes individual achievements.
Jewelry Associate Development and Recruitment: An important part of the
success of the jewelry team is recruiting new associates and developing existing
associates. The entire team is constantly looking for new salespeople with
natural sales skills. Jewelry associates take advantage of weekly training
programs to further improve their selling skills and product knowledge.
Expectations are created for all associates and achieving these expectations
drives improvement and recognition. These expectations and sales goals are
watched very closely by the entire team to enhance their attainment and
celebrate their victories.
CROSS SELLING
It is critical that the hardline customer become a jewelry customer, and
vice versa, as the customer who purchases both jewelry and hardlines is more of
a repeat shopper generating significantly higher annual sales than either a
jewelry-only or hardlines-only shopper.
Several initiatives are being undertaken in this area. For example, jewelry
operations is undertaking an entrepreneurial effort to promote daily special
items at the front of the store. A jewelry sales associate will greet customers
upon arrival at the front door with a daily jewelry special, such as a watch.
This shows customers a bargain that could excite them about an opportunity in
jewelry, thereby potentially converting hardline customers to jewelry customers.
SHRINK
Service Merchandise is targeting a significant reduction in total shrink in
1999. Several steps are being taken to accomplish this goal. They include:
A Store Structure More Attuned to Shrink Issues: Responsibilities and
accountabilities will be better defined, with the Operations Manager
specifically responsible for shrink performance, cycle counts and inventory
management issues.
Cycle Counts: Cycle counts are periodic counts of items most subject to
shrink. We will focus on counting these items every 60 days.
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Interim Physical Inventory: This inventory will take place in July of
1999 (only), to provide a "base line" inventory level and year-to-date shrink
related to the tumultuous period of the January -- April restructuring and
related activities.
System Enhancements: These enhancements will facilitate more accurate
monitoring and reporting (for example, a "hot list" report will be developed to
verify receipt of certain high shrink items and high value merchandise).
GainShare Program: Unfortunately, employee shrink is a significant issue
at all retailers; our new GainShare program will encourage employees to meet
shrink reduction goals, providing a win/win for them and Service Merchandise.
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E-COMMERCE AND OTHER DISTRIBUTION CHANNELS
Our fulfillment capability remains a strength of Service Merchandise.
The goal of this strategic element is to leverage Service Merchandise's
core competency in distribution and order fulfillment to maximize sales in our
growing Internet business, mail/phone orders generated in large part from the
fall Sourcebook and from a new emphasis on corporate sales. These alternative
distribution channels provide the strongest vehicles for increasing top line
sales with less capital and risk than new stores.
FULFILLMENT CAPABILITIES
Order fulfillment is a core competency of Service Merchandise. In 1997, the
last year the catalog showroom format was fully operational, non-store sales
were over $100 million. The transition to self-service retail stores has
dramatically reduced these non-store sales. However, the fulfillment capability
(which many Internet retailers lack) remains a strength of Service Merchandise.
We fill orders primarily from our fulfillment center in Nashville, but also
have the capability to fill orders from our warehouses or any of our stores if
that is where the product is located. This gets the product to the customer
quicker than if the product first was shipped to the fulfillment center, then to
the customer.
Several steps are being taken to improve the fulfillment center and reduce
the reliance on store order filling. The goal is to be able to ship 80% of all
non-store orders directly from the fulfillment center and 20% from our
warehouses or stores. We are reviewing the mix of SKUs to accommodate a higher
fill rate at the fulfillment center and are analyzing the space requirements to
carry more on-hand inventory at the fulfillment center.
INTERNET BUSINESS
We believe that the Internet business represents a growth opportunity for
Service Merchandise. We are enhancing our capabilities in three areas:
Technological infrastructure: Based on our review of the hardware
requirements to meet the peak traffic of 1999, we have begun installation of
additional servers and peripheral equipment, which we believe will be completed
by October. We are integrating the Internet systems with the existing
fulfillment and inventory systems to minimize manual intervention. The
anticipated capital investment for this activity in 1999 is $1.35 million.
Web site development: An internal team is working on improving the ease
of shopping, maneuverability and search functionality of our web site. The
typical Internet consumer has an extremely short attention span and will not
tolerate a slow or confusing site. As with our efforts in store operations, we
intend to provide our Internet shoppers with a more comfortable shopping
experience.
Web site advertising: In order to meet our revenue goals, we must draw
people to our web site. We are exploring many ways to increase on-line
advertising, using banners, links from other sites, sponsorships, partnerships
and revenue sharing opportunities on major portals. This is an advertising area
that is evolving every day. We are constantly receiving
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and reviewing advertising opportunities, and are taking advantage of those that
will increase site traffic. We are also utilizing in-store opportunities to let
customers know about our web site, including bags and in-store signs, as well as
integrating our Internet capability and web site address in our other media such
as our flyers, inserts and the Sourcebook.
PHONE ORDER BUSINESS
The Sourcebook is expected to stabilize the phone order business. Several
steps are being taken to maximize our phone order sales opportunities including
special incentives to generate add-on sales to phone orders, and free delivery
on orders over a minimum dollar amount to increase order size. To generate more
calls, we are increasing exposure in direct mail flyers and will provide key
placement exposure for phone order business in the Sourcebook. The customer
database will be used to identify phone order customers for targeted promotions.
CORPORATE SALES
Service Merchandise is developing a program whereby other companies will
reward their employees with Service Merchandise gift cards in recognition of
special achievements such as service milestones and sales goals. We are also
increasing our tradeshow advertising and presence, as this is a major selling
opportunity.
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IV. CONCLUSION
The Service Merchandise team believes that its mandate for 1999 is clear:
the Company must complete the stabilization of the business and begin to
leverage significant merchandise mix, marketing, store presentation and cost
reduction accomplishments to demonstrate tangible evidence that it can
strengthen and grow. We believe the measure of success this year should be
strong liquidity and improving comp store results. The 2000 and 2001 operating
plans will lay out the roadmap for the future.
We believe that we have made meaningful progress toward achieving our 1999
goals already:
- We have established a permanent management team to lead us through the
reorganization.
- We have the financial resources, through our DIP Facility and the growing
support we are earning from our suppliers, to run our business
efficiently.
- We have developed an achievable "bottoms-up" business plan that focuses
on a very important long-term constituent: The Customer.
- We have renewed our commitment to providing the customer what he/she
demands from us -- a great jewelry offering and 8-12 authoritative
assortments of key hardlines departments which include: photo,
telephones, home furnishings, luggage, tabletop, kitchen, electronics and
toys.
- We have begun to re-establish the brand and pricing approach which the
customer requires: a wide selection of brand name products with an
appropriate range of price points that includes entry level offerings in
all key departments.
- We have provided our employees with executive-led direction and
meaningful incentives to sustain the high day-in and day-out achievement
orientation that this turnaround requires.
We are excited about the challenge that lies before us. We look forward to
persuading all our important constituencies -- customers, employees, lenders,
suppliers, creditors -- that we can all contribute to returning Service
Merchandise to profitability.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This 1999 Operating Plan was developed by senior operating and financial
management of Service Merchandise Company, Inc. Management believes that this
plan is both achievable and realistic, given today's market conditions. However,
the 1999 Operating Plan is based on a number of assumptions and estimates that,
although considered reasonable by management, are inherently subject to
significant uncertainties and contingencies. There can be no assurance that the
anticipated results shown will be realized and actual results may vary
materially from those presented.
This 1999 Operating Plan includes certain forward-looking statements based
upon management's beliefs, as well as assumptions made by and data currently
available to management, many of which are beyond the Company's control. This
information has been included in reliance on the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Consequently, such matters
should not be regarded as representations or warranties by the Company that such
matters will be realized. Actual results may differ materially from the
information contained in this 1999 Operating Plan. The Company undertakes no
obligation to update or revise this 1999 Operating Plan.
The Company's liquidity, capital resources and results of operations are
subject to a number of risks and uncertainties including, but not limited to,
the following: the ability of the Company to continue as a going concern; the
ability of the Company to operate pursuant to the terms of the DIP Facility; the
ability of the Company to operate successfully under a Chapter 11 proceeding;
approval of plans and activities by the Bankruptcy Court; risks associated with
operating a business in Chapter 11; the ability of the Company to create and
have approved a reorganization plan in the Chapter 11 Cases; adverse
developments with respect to the Company's liquidity or results of operations;
the ability of the Company to obtain shipments and negotiate terms with vendors
and service providers for current orders; the ability to conduct inventory
liquidation sales to improve liquidity; the ability to develop, fund and execute
an operating plan for the Company; the ability of the Company to attract and
retain key executives and associates; competitive pressures from other
retailers, including specialty retailers and discount stores, which may affect
the nature and viability of the Company's business strategy; trends in the
economy as a whole which may affect consumer confidence and consumer demand for
the types of goods sold by the Company; the ability to maintain gross profit
margins; the seasonal nature of the Company's business and the ability of the
Company to predict consumer demand as a whole, as well as demand for specific
goods; the ability of the Company to attract and retain customers; costs
associated with the shipping, handling and control of inventory and the
Company's ability to optimize its supply chain; potential adverse publicity;
availability and cost of management and labor employed; real estate occupancy
and development costs, including the substantial fixed investment costs
associated with opening, maintaining or closing a Company store; the potential
delisting of the Company's securities and the absence of an active public
trading market; and the ability to effect conversions to new technological
systems, including becoming Year 2000 compliant.
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PROFESSIONALS RETAINED BY SERVICE MERCHANDISE RELATIVE TO ITS REORGANIZATION
Corporate Counsel Bass, Berry & Sims PLC
Restructuring Counsel Skadden, Arps, Slate, Meagher & Flom
LLP and Affiliates
Financial Advisors Jay Alix & Associates
Investment Bankers Peter J. Solomon Company
Inventory Liquidation Professionals SGO (a join venture comprised of
Schottenstein/Bernstein Capital Group,
Gordon Brothers Group, LLC and
Ozer Group)
Real Estate Agents The Keen Venture (a joint venture
comprised of Keen Realty Consultants,
Inc. Trammel Crow and Dean Associates)
Real Estate Appraisers DJM Asset Management LLC
Communications Professionals Sitrick and Company
<PAGE> 32
AMERICA'S LEADING JEWELER
SERVICE MERCHANDISE
NO PLACE BUT SERVICE MERCHANDISE
LOW. LARGE. GUARANTEED.
WWW.SERVICEMERCHANDISE.COM
