Petrie Stores Corporation

views updated

Petrie Stores Corporation

70 Enterprise Avenue
Secaucus, New Jersey 07094
U.S.A.
(201) 866-3600
Fax: (201) 866-5483

Public Company
Incorporated: 1932
Employees: 17,500
Sales: $1.4 billion
Stock Exchanges: New York
SICs: 5621 Women’s Clothing Stores; 5632 Women’s Accessory and Specialty Stores; 5699 Miscellaneous Apparel and Accessory Stores

Petrie Stores Corporation, a major retailer of women’s apparel, operates stores under a variety of names, including Petrie’s, Winkelman’s, Stuarts, M.J. Carroll, Rave, and G&G. Since its incorporation, the retailer has been dominated by the ambition and personality of its founder, president, chairman, and chief executive officer, Milton J. Petrie, who made his fortune by running a company that catered to teenagers for more than half a century.

Milton Petrie was raised in Salt Lake City, Utah, the son of a Russian immigrant who ran several clothing shops. His father went bankrupt while Milton Petrie was young, and Milton worked various jobs until he saved enough money to open a small hosiery shop called Red Robin in Cleveland, Ohio, in 1927. He began to expand, and in 1932, backed by a loan from the Reconstruction Finance Corporation and four silent partners, Petrie Stores Corporation was incorporated in New York. Petrie expanded his stores into a small chain and added other apparel items, and sales soon reached $7 million. By 1937, however, the Great Depression and Petrie’s too-ambitious expansion forced him into bankruptcy. Petrie lost most of his stores and was obliged to buy out his partners for $37,500, a debt that took more than three years to pay off.

Petrie forged ahead, determined to succeed, though his aversion to debt led him to move cautiously. Early on, Petrie concentrated on opening shops in downtown areas. As retail activity moved away from Main Street, Petrie sought out space in strip malls, opening shops in centers concentrated in the Midwest.

With the dawn of the age of the shopping mall, Petrie moved aggressively to take full advantage of those controlled environments, where teenagers came to congregate.

From the beginning, Petrie courted young women by providing budget-priced apparel. Under the names Petrie’s, Marianne, and Stuarts, Petrie Stores worked by the same guidelines throughout their history. Stores were open six days a week. Advertising was considered unnecessary as the shops relied on their low prices and the closed environment of the shopping center to lure customers. The shops did not deliver or make alterations, and merchandise consisted of in-house brands. Petrie Stores concentrated on turning over and moving inventory quickly. If goods failed to sell, they were soon marked down to make room for something else. Business was largely conducted via cash, and Petrie kept prices low to lure free-spending adolescents. Referring to his target customers, Petrie told Forbes, “These girls. They’ll live on hot dogs so they can spend their money on clothes. You can’t beat a market like that.”

Petrie also kept overhead low by leasing, rather than buying, space. He was known as a bare-knuckles real estate negotiator who would threaten when necessary to keep rent low. His stores were invariably staffed by women; he admitted his philosophy in Forbes: “With a woman, you are likely to have someone who is supplementing her husband’s income, or a divorcee, and you get a helluva girl. To get the comparable person, you would have to pay the man more.”

Petrie’s belief that female staffers were an asset to the company extended to corporate headquarters, where women dominated senior management years before such practices became commonplace. Hilda Kirschbaum Gerstein, for example, started her career with Petrie at the age of 16 as a clerk hired the first day the first Petrie store opened in 1927. For years as vice-president and then as president (she eventually became vice-chair in 1982), she ran the company’s day-to-day operations, while Petrie concentrated on negotiating the lease agreements that were such a crucial factor in Petrie Stores’ success. Dorothy Fink Stern and Jean Roberts, longtime vice-presidents, also started out with Petrie in the early days. For years they were among the highest ranking women in the business, yet their salaries were always modest, less than their male counterparts at the company. “The girls,” as Petrie referred to them, kept their eyes on merchandising and store operations. Petrie was quoted as saying that he believed a big part of Petrie Stores’ success had been its reliance and recognition of women in management.

By 1958 Petrie Stores comprised a 77-shop chain with $17 million in annual sales, yet no detail proved too small to escape Petrie’s attention. His unswerving cost-consciousness led Petrie to accumulate much capital as he steadfastly refused to acquire long-term debt in the name of expansion. By 1968, although Petrie’s company had more than 150 stores and $76.8 million in sales, he had saved so much cash that the Internal Revenue Service (IRS) wondered whether these reserves had “accumulated beyond the reasonable needs of business.”

In 1960 Petrie used half of his $5 million in capital to acquire a position as the largest outside stockholder of one of his major competitors, Lerner Stores. Lerner had been pressuring his suppliers, so Petrie bought a stock position to try to force a merger. Lerner’s owner, Rapid-American Corporation, disliked the notion and instead tendered for Lerner. Petrie thus doubled his investment, and funds were used to aid expansion.

By the late 1960s increased sales and rising earnings fueled aggressive expansion. In fiscal 1973 Petrie Stores had grown to number 250 and sales reached $169 million; earnings had risen from 66 cents a share in 1968 to $2.02 in 1973. Despite the accumulation of cash, Petrie remained hesitant to diversify, declining to carry larger sizes or maternity clothing. Rapid growth continued through the 1970s, and by 1980 net income had grown at a compounded annual rate of 26 percent on 19 percent sales growth. Petrie Stores’ peak year proved to be 1979, when profits set a record of $52 million on $446 million in sales.

By the late 1970s the fast-paced growth of the previous decade came to a halt, however. A major factor was the steep increase in shopping-center rental rates due to rising energy costs and interest rates. Petrie was able to manoeuver around this by buying existing stores with long-term leases having lower rental rates; yet he had to borrow money to do it. Many of these stores were family-run business that were bailing out during the economic downturn of the early 1980s. This period was marked by a string of acquisitions: Joseph R. Harris in 1979; G&G Shops in 1980; Franklin Stores in 1981; Hartfield Stores and Ranch Shops in 1982; Whitney Stores in 1983; and Petrie’s largest purchase, the 400-store Miller-Wohl chain, which he bought for $270 million in 1984. In 1985 Winkelman Stores was purchased for $11 million in cash and $7.2 million in Petrie Stores shares; a 25 percent interest in Paul Harris Stores was also acquired. With the spate of acquisitions, sales increased but profits stalled.

Petrie’s other major investment was in Toys “R” Us, the shares of which the company had started purchasing in 1978; by 1980 Petrie Stores had a 23 percent stake in the hugely successful retailer. That company’s striking gains helped cushion Petrie Stores’ balance sheet as profits began to fall. In 1987 the earnings garnered from the Toys “R” Us stock accounted for 80 percent of Petrie Stores earnings. The following year Petrie reduced the company’s position in Toys “R” Us from 26 percent to 14 percent by redeeming $199.4 million worth of the stock’s convertible debentures to pay off company debt. Under accounting rules, Petrie Stores was then unable to include its profits from Toys “R” Us stock on its income statement.

In 1986 earnings began to slide, even as sales continued to grow. Some pointed to Petrie’s reluctance to diversify his large spaces—which averaged 10,000 feet—into other kinds of stores. Petrie’s advancing age and continued tight grip worried investors, who were concerned that his staying power as well as that of his top lieutenants (Gerstein was 76, Roberts was 71, and Stern was 69) had become a liability in a volatile retail environment dominated by rapidly changing fashions. Some analysts felt that the stores and the merchandise needed updating, while others pointed to Petrie’s lack of professional managers with whom to share power.

Milton Petrie’s attempts, but ultimate failure to find a successor also worried Wall Street. In 1982 Michael Boyle, who had been an executive at Federated Stores, was brought in to become president and chief executive officer. Two months later Boyle departed with a $5 million termination settlement. In 1986 Petrie hired his 24-year-old grandson Matthew Miller with the stated intention of having him eventually fill his chair; within two years Miller had resigned without explanation. There was speculation that it was the absence of someone to whom to pass the reins, especially within his family, that kept Petrie from showing up at the office. None of his children had taken an interest in the business, and other relatives had not worked out. “My mother made me hire everybody, and they were all over the place, ruining the business,” Petrie told Forbes. “Eventually I got rid of them.”

Petrie responded by starting to renovate stores (a five-year plan started in 1987 cost $240 million) and update merchandise. Long-term debt accrued to finance his early 1980s expansion was reduced. And, Petrie finally saw the wisdom in entering the larger-sized clothing market. He had passed up the opportunity to buy the large-sized clothing chain Lane Bryant in the early 1980s because he had thought growth potential was lacking in that market; he came to regret that decision. The Plus size stores brought a significant share of earnings, and management accelerated the pace of new store openings.

Petrie Stores’ depressed earnings did not keep the personal worth of Milton Petrie—who owned 60 percent of Petrie Store stock—from reaching more than $1 billion in 1987. His empire had grown to 1,600 stores with $1.2 billion in sales. Petrie, who had gone bankrupt at age 35, was a billionaire at age 85.

Earnings dropped to a 20-year low in 1990 as the apparel industry as a whole took a hit in the economic downturn. Petrie continued to add new stores, though high prices for retail space in the major malls was seen as a reason Petrie turned to downtown locations and strip malls. Petrie Stores shed the ailing Paul Harris Stores, which had filed for bankruptcy in February of 1991.

As Petrie Stores moved through the 1990s, analysts and investors looked to the time when Milton Petrie would not have final say over the business. It was feared that the same qualities that had brought the company such outstanding success—tenacious ambition, tight-fisted management, and strong-willed personalities—were in later years keeping the stores from making much-needed changes. A newfound consumer appreciation of value and the waning of the popularity of designer labels, however, placed Petrie Stores Corporation in the position of having kept one step ahead of the market—by remaining constant.