Gadzooks, Inc.

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Gadzooks, Inc.

4801 Spring Valley Road, Suite 108B
Dallas, Texas 75244
U.S.A.
(214) 991-5500
Fax: (214) 980-8230
Web site: http://www.gadzooks.com

Public Company
Incorporated: 1983
Employees: 1,388 (1995)
Sales: $84.6 million (1995)
Stock Exchanges: NASDAQ
SICs: 5651 Family Clothing Stores

Gadzooks, Inc. is a rapidly growing specialty retailer of casual apparel for teens in metropolitan and middle markets in the southwestern, midwestern, and southeastern United States. The company’s goal is to become a national retail chain in major metropolitan areas and small cities.

Gadzooks was founded in 1983 by Jerry Szczepanski and Larry Titus. Szczepanski had no previous background in retail. He had been a university teacher and worked in computers before serving as vice president of T-Shirts Plus, a franchise co-owned by Titus and another partner. When Szczepanski’s sons had trouble finding clothes they liked to wear, their dad decided to develop a retail store where teens could buy the clothes they liked, as well as mingle with others their own ages. In the 13 years since that first store opened, Gadzooks grew into a chain of 183 stores in twenty-four states, known for its original merchandising and expansion strategies.

Key Elements of Early Strategy

Gadzooks’s unique merchandising strategy involved several key elements. First, Gadzooks stores sought 13- through 19-year-olds from Middle America as customers. Szczepanski recognized that there were a lot of teenagers in America but that they were an underserved segment of the marketplace. Research showed that teens were a significant portion of the population, in fact the fastest-growing segment of the American people. In 1996 the U.S. Census Bureau estimated that there were 25 million teens in the United States, with that number growing to 31 million by year 2010—the most teens in U.S. history. The spending power of teens of course increased with their number. Since teens frequently outgrew their clothes or lost interest in clothes that were out of fashion, they were willing buyers for Gadzooks’s merchandise. According to Szczepanski’s 1995 letter to shareholders, teens’ “annual spending power is estimated at almost $90 billion, while they influence purchases by their parents and others totaling more than twice that amount [about $200 billion].” In addition, the company found that the average spending of teens increased 50 percent in the past five years to about $3,100 per teen in 1995.

Secondly, Gadzooks stores carried “Cool stuff for teens.” Basically, Gadzooks sought a broad range of brand-name apparel and accessories for mainstream teens who recognized labels and fashion. The challenge to Gadzooks’s corporate buyers was to identify and provide casual apparel and accessories that fit the whims of teen buyers. Gadzooks merchandising emphasized finding the next new trend—such as Jams in the 1980s—and bringing it to the marketplace. Szczepanski told Robertson Stephens & Company conference attendees in 1996 that “teen heroes create demand; it’s our job to put it in the stores.” Szczepanski noticed that teens liked brand names, which held less risk for the company than Gadzooks manufacturing private-label products for sale in its stores. And brand-name items allowed the store to respond quickly to the demands of teens. Stores stocked a variety of fashionable labels, all easily recognizable by the teen population. Mossimo brand items, for example, accounted for 8 percent of the company’s purchases in 1994; No Fear contributed 9 percent that year. Other name brands such as XOXO, Calvin Klein, Dr. Martens, and Oakley were also purchased regularly by Gadzooks’s buying staff. As Szczepanski explained in the 1995 annual report: “Gadzooks’s success has been built over the years by its proven capability to identify fashionably cool trends and to get into the stores those fashions and labels that teens want to see and be seen wearing.”

Unlike many other specialty retailers for teens, Gadzooks carried merchandise for both male and female teens to broaden its customer base. Overall, the stores maintained five categories of merchandise: young men, which accounted for 27.1 percent of sales in 1994; junior women, 24.9 percent of sales that year; unisex apparel, 21.7 percent of sales; accessories, 17.7 percent of sales; and footwear, 8.6 percent of sales. (The junior women, young men, and unisex categories traditionally accounted for three-quarters of the company’s sales; footwear and accessories made up the remaining quarter.) Without reliance on a single product category, this dynamic management of merchandise mix maximized sales and profits for the company. Executives also carefully monitored sales, so products matched buying patterns and trends.

All Gadzooks’s merchandise reportedly came from U.S. suppliers since overseas sources might take too long to deliver material, thus risking merchandise arriving after trends had passed. The company worked with 450 vendors to maintain 2,000 stock keeping units (SKUs) in its stores, including tops, jeans, shorts, junior dresses, swimwear, t-shirts, shoes, sunglasses, watches, and costume jewelry.

Thirdly, Gadzooks committed itself to outstanding customer service for its teen shoppers. The company developed a “Gaditude” through which a young sales staff created a positive peer environment for teens meeting and shopping. The company insisted on a high level of professional, attentive, and personalized customer service. Sales associates were instructed to greet each customer, inform customers of trends, and suggest merchandise to shoppers. Above all, sales staff treated teens like adult customers, not mall thugs.

Keeping with its youthful orientation, Gadzooks staffed its stores with young sales associates. Generally, sales and assistant store management staff were about 17 or 18 years old. In fact, all of Gadzooks’s employees were on the young side. The average age of employees working at the corporate headquarters in Dallas was 28 in 1996. Buyers were about 30 years old and all hired from within the Gadzooks organization except for the company’s original buyer. Throughout its history, Gadzooks invested heavily in its personnel and systems, providing career advancement opportunities for its sales staff and management levels. Szczepanski said in the Daily News Record: “I’m a firm believer that if you give a 21- or 24-year-old responsibility, they can handle it. They don’t have to wait all their lives to have the chance to have responsibility. Give it to them and they’ll take it and run with it. We’ve proven that for many years.”

Gadzooks also designed its stores to be interesting, entertaining, and attractive to teens. All stores featured neon lights, television monitors showing music videos, creative signs, and stylish fixtures, including a signature Volkswagen Beetle for displaying merchandise. “Gadzooks has been successful because of its attitude towards serving teenagers,” stated the company’s first ever annual report. “Our stores are high-energy, fun places to visit and show. We want our customers to feel like Gadzooks stores are theirs, so we give them a store filled with music, excitement, clothing and accessories, and the special service they deserve.” Parents liked the stores, too.

Fourthly, Gadzooks concentrated its stores in malls. Stores—each about 2,200 square feet—were opened seven days a week during normal mall hours. Maria Medaris, an analyst for Alex. Brown & Sons, explained the appeal of mall stores for retailers such as Gadzooks. “Malls,” she said in Investor’s Business Daily, “are still the one place where you can drop off your kids at age fourteen, and they won’t get into trouble.”

The company selected highly visible locations for its mall stores in metropolitan markets, including Dallas, Houston, Atlanta, Cincinnati, and Kansas City. Gadzooks stores also settled in middle markets—notably, Amarillo, Texas; Peoria, Illinois; San Angelo, Texas; Joplin, Missouri; and Tupelo, Mississippi. The company chose new store sites to balance test markets where it had no previous experience, to capitalize on new markets where a store had been tested and showed potential for expansion, and to enlarge mature markets that required additional stores. Because Gadzooks maintained a year-round business with three major selling seasons—spring break, back-to-school, and Christmas—its opening of new stores (and the timing of those openings) became more crucial to its sales activities than the Christmas holiday season. In its whole history, Gadzooks never made an acquisition of a store, except for reclaiming some franchises during the 1980s. It always opened new ones.

Store Expansion, 1980s–90s

Jerry Szczepanski and Larry Titus opened their first store in 1983 in a Mesquite, Texas, mall in a space formerly occupied by a waterbed store. They signed a one-year lease there. In May 1984 the pair launched a second store in a Dallas mall. Their next store opened in Waco a few years later. Said Szczepanski in a Daily News Record interview with Julie Vargo: “We knew if we could make the concept work in Waco, we could expand it nationwide.” The next store debuted in Wichita Falls, Texas.

Throughout the 1980s Gadzooks enjoyed modest growth as Szczepanski and Titus developed and refined the merchandising concept. They wanted to move into new markets, but needed money to do that. So they tried expanding through franchising. Though they thought it would take two years, they sold 20 franchises in three months in Texas, Oklahoma, Louisiana, and New Mexico. But when the franchisees wanted to change the stores’ merchandising strategy to cash in on a skateboarding frenzy, Szczepanski and Titus objected. They wanted their stores back. Throughout 1987 and 1988, the two bought back all 20 franchised stores and started opening other stores.

Company Perspectives:

A high-energy retail environment catering to today’s teenager. Fun clothes and accessories in a merchandising mix that is ever-changing with the latest styles and attitudes of our customer. Gadzooks is what cool is. Fresh. Exciting. Ever-changing. Your style. Gadzooks style. Being cool without being on the edge. What’s hot now, we’ve got now. Selection and very special service. Gadzooks. Cool stuff for teens.

By January 1992, they operated 33 stores and decided on a more aggressive expansion into new markets, as well as planned to solidify Gadzooks’s presence in existing markets. The company’s net sales were $18.5 million that year, with average net sales per store of approximately $605,000. A year later Szczepanski and Titus had added 23 new stores and closed one store for a total of 43 Gadzooks outlets. Net sales amounted to $25.4 million. In January 1994 Gadzooks stores numbered 65 and net sales had grown to $38.2 million.

Throughout 1994 Gadzooks enhanced its merchandising strategy in preparation for more store expansion. The company hired a new merchandising manager, improved merchandise allocation and distribution functions, and reviewed merchandise assortment in stores to reduce stock-keeping units in certain categories. The changes resulted in rising inventory turns, improved presentation of merchandise in stores, and increased sales of high-margin merchandise. By January 1995 there were 90 Gadzooks stores, and sales continued to be strong: Net sales totaled $56.5 million, and average net sales per store were $698.1 million. The company achieved comparable-store sales gains every year in its history, so it felt ready to make some bold moves.

Gadzooks further accelerated its store opening program. Then, in October 1995—after 12 years as a progressive, expanding private company—Gadzooks organized the initial public offering of the company’s common stock. With IPO shares selling at $12 to $14 per share, the offering raised $18.5 million. Gadzooks used $6.1 million from the sale to repay debt, and $2.1 million to be paid as dividends on preferred stock. Gadzooks employed the rest of the proceeds for store openings, remodeling, and working capital. The year 1995 became the most profitable in the company’s history. Net sales equaled $84.6 million; net income more than doubled.

The company again initiated a common stock offering in January 1996. By then Gadzooks comprised 126 stores in 21 states. Average net sales per store were $776,800. By March 1996 the company already opened 20 of the 45 or 50 new stores planned for the year. In September Gadzooks planned for 163 stores to be in operation in 23 states—a plan accelerated to 183 stores in 24 states before the year’s end. Instead of the projected 50, Gadzooks stores increased by 57. According to Szczepanski: “Prime store sites with excellent lease terms are more available, and the first group of 20 stores we opened before the spring break season have been performing well above plan. As a result, our board of directors approved moving up the timetable for some stores originally scheduled for opening during the first part of fiscal 1997.”

Continued Growth for the Future

In 1997 Gadzooks commissioned a new, 117,000-square-foot distribution facility to service its growing number of stores. Gadzooks anticipated operating hundreds of stores by the year 2000. Kathleen Brown Oher of Dallas-based Southwest Securities, Inc., saw this growth in store numbers as a real possibility for Gadzooks, reporting in Investor’s Business Daily that she believed the company could grow to 400 stores by then. Szczepanski concurred, “There are significant growth opportunities ahead for Gadzooks as we expand to meet the growing needs of our teenage customers. Our … stores, currently serving both metropolitan and middle markets …, have barely rippled the surface of the vast potential that lies before us. We are excited by the opportunities that we now have as a public company.”