Piercing Pagoda, Inc.

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Piercing Pagoda, Inc.

3910 Adler Place
Bethlehem, Pennsylvania 18017
U.S.A.
(610) 691-0437
Fax: (610) 694-9077
Web site: http://www.pagoda.com

Public Company
Incorporated: 1973
Employees: 3,837
Sales: $222.1 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: PGDA
NAIC: 44831 Jewelry Stores

A fast-growing jewelry retailer, Piercing Pagoda, Inc. sells moderately priced gold and silver jewelry through a vast network of mall-based kiosks and conventional stores. In 1999 there were 940 outlets in 47 states and Puerto Rico operating under the names Piercing Pagoda, Gold Plumb, and Silver & Gold Connection. Typically, Gold Plumb and Silver & Gold Connection outlets were established in malls where a Piercing Pagoda unit already was in operation. Although merchandise selection varied slightly within the three formats, all of the company’s retail locations offered a range of 14-karat and ten-karat gold jewelry, including chains, bracelets, earrings, charms, and rings. The average price of the jewelry was roughly $25. The company pierced ears free of charge with the purchase of earrings and attracted repeat customers by offering membership in a buy-five-get-one-free jewelry club. Through two acquisitions in 1997, Piercing Pagoda eliminated all national rivals, leaving only relatively small, regional companies as its competitors. In late 1998 and early 1999 the company began introducing diamond jewelry in its stores, following the mid-1998 launch of a new, all-diamond kiosk concept called Diamond Isle.

1972: The First Kiosk

The founders of Piercing Pagoda, Bernard and Bertha Cohen, started the company relatively late in life. Bernard Cohen was in his mid-50s when he and his wife opened their first jewelry kiosk in May 1972 in Plymouth Meeting Mall, located in suburban Philadelphia. To Bernard Cohen, a businessman who had traveled extensively with his wife and developed a particular affection for Japan, the Plymouth Meeting Mall kiosk resembled a Japanese pagoda. Based on this similarity the business attained its name, but the essence of Piercing Pagoda—a retailer of jewelry that pierced customers’ ears at small stands—drew its inspiration from Bertha Cohen, whose family had operated a number of jewelry stores in Bethlehem, Pennsylvania. As a way of promoting sales of its diamond earrings, Bertha Cohen’s family—the Finkelsteins—began piercing ears in boothlike structures. From this example, the Cohens took their cue, offering customers fast, convenient ear piercing and inexpensive jewelry, but the important difference was the location of the Cohens’ kiosk. Situated in the walkways of the shopping mall, a permanent feature amid pedestrian traffic flow, Piercing Pagoda benefited enormously from the efforts of its more traditional neighbors. The retail occupants of the mall spent time and money to attract customers, and Piercing Pagoda enjoyed the fruits of their labors and investment without any comparable expense of its own. The Cohens had struck upon a concept with promising potential—though far from the magnitude Piercing Pagoda would later exude—and began expanding it by franchising Piercing Pagoda kiosks.

The opportunity to operate a Piercing Pagoda franchise introduced Richard H. Penske, the son of a printer and a Lehigh University graduate, to Bernard Cohen. Cohen’s foray into franchising ended within a year of its introduction, however, proving to be an intolerable way of operating the business. Cohen preferred to operate the kiosks as company-owned properties, and he hired Penske to help him in his expansion of the concept. As the sprawl of suburbia extended outward from large metropolitan areas during the 1970s and 1980s, fertile ground was created for the establishment of more malls. As more malls opened, the Piercing Pagoda chain flourished, opening an increasing number of kiosks that stayed true to the formula developed early in the company’s history. The company remained free of debt as it expanded and it did not stray into offering other merchandise, such as precious gems or costume jewelry. The company did expand beyond selling only gold earrings, however, offering its customers gold chains and bracelets beginning in 1979 and later fleshing out its merchandise selection to include gold charms and rings. The company also opened jewelry kiosks that operated under different names, beginning with the opening of the first Gold Plumb kiosk in 1981, but the fundamental aspects of the company remained unaltered as it grew into an extensive chain.

1986 Change in Ownership Spurs Expansion

For Penske, who had assisted his mentor in the expansion of Piercing Pagoda and witnessed its retail prowess, ownership of the concept gradually became his aim. By 1986, when there were more than 200 company-owned kiosks in operation, Penske was ready to make his bid for the company. He borrowed heavily to accomplish his goal, accumulating nearly $17 million of debt to buy out the Cohens’ interest in Piercing Pagoda. Although he refused to divulge exactly how much he paid the Cohens for control of the company, he did concede it was approximately half the total he borrowed.

Under Penske’s guidance, the Piercing Pagoda name gained national prominence, evoking the fears of competitors and grabbing the attention of Wall Street, but neither reaction was educed during his first years of control. Strapped for cash, Penske was unable to expand—his ultimate desire—in any significant magnitude for nearly a decade, forcing him to exert his new-found influence in other ways. Penske worked on fine-tuning the Piercing Pagoda concept. He bided his time by improving the operations he already controlled, succeeding in increasing sales, improving profitability, and procuring the proper inventory for the kiosks. Penske also assembled an executive team to build upon the sturdy foundation he was creating. By 1994, the foundation was firmly set and the company’s finances were in order. The time had come for aggressive expansion.

To help him in his expansion of the concept, Penske, like Cohen before him, solicited the aid of an assistant and hired John F. Eureyecko in 1992. Seven years Penske’s junior, Eureyecko brought with him 18 years of experience as an executive with Triangle Building Supplies and Lumber Co.—experience that related to a different product, to be sure, but the differences between lumber and jewelry were minimal, in Eureyecko’s mind. “A lot of the elements of success are the same with any business, regardless of the product,” he explained. With Penske and Eureyecko leading the way, the company prepared for its initial public offering (IPO) of stock, slated for October 1994. The chain, before the IPO, comprised 279 kiosks, each offering a selection of 14-karat and ten-karat gold earrings, chains, charms, bracelets, and rings, as well as a selection of silver jewelry. Prices ranged between $11 and $64, governed by an everyday low price policy implemented in 1992, with the average Piercing Pagoda product selling for $24. The kiosks averaged 153 square feet and typically generated in excess of $200,000 in sales a year, producing $58.7 million for the company in 1993.

Piercing Pagoda completed its IPO on October 24, 1994, raising $15.7 million in net proceeds. The stock debuted on the NASDAQ exchange at $11 per share. With the money gained from the IPO, Penske and Eureyecko not only planned to increase the number of kiosks under their control, but also envisioned diversifying the company’s expansion on several fronts. They were considering the acquisition of competing companies and were intent on experimenting with complementary retail concepts. They anticipated introducing mall carts to sell silver jewelry during holiday seasons and they considered opening kiosks in locations other than mall concourses, such as in resort locations and airline terminals. Perhaps most ambitious, the company planned to open small conventional stores in malls, units referred to as “in-line” stores. In each of these potential areas of expansion, the company followed through with its plans. In the years ahead, acquisitions were completed, silver-selling mall carts debuted, kiosks were established in resort locations and airline terminals, and in-line stores were opened, representing what some pundits believed was the company’s most promising avenue of growth.

The first in-line store opened in 1995, located in Deptford Mall, near Philadelphia. Other Piercing Pagoda in-line stores were added to the company’s portfolio of operations, their inclusion regarded as significant because they allowed the company to establish a presence in malls where kiosks were not permitted. Moreover, the in-line stores, typically 600 square feet, allowed Piercing Pagoda to offer a larger selection of merchandise, which included higher priced items not available at the company-owned kiosks. The more upscale in-line stores, decorated in cherry woods and tapestries, resembled traditional jewelry salons, an environment conducive to attracting an older customer than those who frequented the company’s kiosks.

Company Perspectives:

Our easy-to-shop environment and competitive everyday low pricing attracts both destination customers and impulse shoppers. We differentiate our merchandise selection from other jewelry retailers by focusing on basic styles of lower priced 14 karat and 10 karat gold jewelry, comprised primarily of chains, bracelets, earrings, charms and rings. We believe that, by offering a broad assortment of basic styles, we provide our customers with a wide variety of choices while limiting merchandising risks associated with fashion trends. A large portion of merchandise is common to all stores, and the remaining products are selected based on the characteristics and local preferences of a particular store’s customer base. We also maintain a balance between new merchandise and proven successful styles.

By the end of 1995, there were 366 Piercing Pagoda and Plumb Gold units in operation, but the company had yet to attract widespread attention. Wall Street and participants in the jewelry industry did not raise their collective eyebrows until Piercing Pagoda embarked on the acquisition trail, a direction the company started pursuing in 1996. In 1996 the company acquired bankrupt Earring Tree, gaining 51 kiosks and 17 conventional mall stores, which accelerated the expansion of the in-line store concept. The company opened its 500th store in 1996, ending the year by nearly reaching 600 stores, which included an in-line store located in the El Conquistador Resort in Puerto Rico that opened in December. Annual sales began to rush upward by this point, reaching $121.5 million by the end of the company’s 1996 fiscal year in March. By the following year, widespread attention was focused on the rapidly growing company.

1997: All National Competition Eliminated

Much of the attention attracted in 1997 stemmed from two acquisitions completed during the year, purchases that swelled the ranks of its stores and, most important, eliminated all national rivals. In January 1997 Piercing Pagoda acquired the second largest kiosk jewelry chain in the United States, Gem-stone Jewelry, Inc., for roughly $8 million. The addition of Gemstone, whose kiosks were similar in size and merchandise selection to Piercing Pagoda kiosks, gave the company 93 new kiosks. Three months later, Piercing Pagoda acquired the third largest kiosk jewelry chain in the nation, The Silver & Gold Trading Company, Inc., for approximately $8.2 million. The purchase added 43 kiosks, comparable in size and merchandise to Piercing Pagoda kiosks, and marked the addition of a new format for the company: kiosks that sold their merchandise under the Silver & Gold Connection.

With the acquisition of the only national kiosk jewelry chains, Piercing Pagoda faced only isolated competition from two regional chains, Piercing Ear and Touch of Gold, each of which operated no more than 20 units. Penske, who controlled more than 700 stores, stood as a veritable giant in his market niche. “There’s absolutely no one else around that’s close to us,” he said. Analysts, who had watched the company’s stock increase in value from $11 per share to in excess of $30 per share, surveyed Piercing Pagoda’s market and arrived at the same conclusion. ‘They’ve basically created a barrier to entry,” one analyst remarked.“No one can come in and acquire a chain of any size. They would have to start from scratch.” The absence of any serious competition did not dull Penske’s appetite for further expansion, however. “We have the potential,” he announced in 1997, “to double in size again in another five years.” The company, in 1997, operated in approximately 500 malls, less than half of the 1,200 malls in the country. Further, the company’s expansion was not limited to mall-based locations, evidenced by the debut of the company’s first street location in Old San Juan, Puerto Rico, in January 1998.

To help pay for its acquisition and to gain the financial resources to expand, Piercing Pagoda completed a secondary sale of stock in June 1997, raising nearly $15 million in net proceeds. With cash at its disposal, Piercing Pagoda opened approximately 150 stores between March 1998 and March 1999, giving the company a total of more than 940 stores. The increase included the largest acquisition in the company’s history, the July 1998 purchase of 104 units from Nevada-based Sedgwick Sales, Inc., which controlled a number of differently named kiosk chains. With efforts under way to remerchandise the acquired units, the company launched another new format in mid-1998 called Diamond Isle, a Newark, Delaware kiosk that sold diamond jewelry exclusively. The success of the kiosk prompted Penske to introduce a selection of diamond jewelry into 180 Piercing Pagoda units during late 1998 and early 1999.

With the addition of diamond jewelry and an all-diamond concept, Piercing Pagoda faced a future tantalizingly rich with directions in which to pursue growth. As Penske prepared for the beginning of the 21st century, he planned to ease back on expansion and concentrate on operating performance. Between 60 and 80 new stores were planned for fiscal 2000, including the establishment of a handful of Diamond Isle kiosks. With these short-term objectives directing the company progress at the end of the 1990s, Piercing Pagoda pushed ahead, holding sway as the unrivaled heavyweight in its industry niche.