S&K Famous Brands, Inc.

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S&K Famous Brands, Inc.

11100 West Broad Street
P.O. Box 31800
Richmond, Virginia 23294
U.S.A.
(804) 346-2500
Fax: (804) 346-2627
Web site: http://www/skmenswear.com

Public Company
Incorporated: 1970
Employees: 1,600
Sales: $130.2 million (1997)
Stock Exchanges: NASDAQ
SICs: 5611 Men’s & Boys’ Clothing & Accessory Stores

S&K Famous Brands, Inc. is engaged in the retail sale of men’s tailored clothing, furnishings, sportswear, and accessories, primarily with nationally recognized brand names, at 20 percent to 40 percent less than regular full-priced department and specialty-store prices. At the end of fiscal 1997 (the year ended January 25, 1997), the company was operating 195 stores in 26 states, mostly in the South and Midwest, but including 16 in New York and seven in Pennsylvania. They were generally located in midsized metropolitan-area markets under the name S&K Famous Brand Menswear. All but two were either in strip shopping centers or enclosed shopping malls.

Private Enterprise: 1967–83

S&K was founded in 1967 by I.J. (Hip) Siegel, the retired owner of a small chain of Richmond supermarkets, and Abe Kaminsky, his brother-in-law. At loose ends, they took up a “hobby” that was more like a busman’s holiday: driving up and down Broad Street to make deals with small haberdasheries for overstocked merchandise, then selling it to other businesses out of the trunk of Siegel’s Cadillac. After a while the business got too big for the car and, at their request, Siegel’s son Stuart found a vacant former thrift shop on Main Street that he rented for them at $125 a month. Used initially as a warehouse, it soon became a retail store under the name S&K Famous Brands. Kaminsky sold out in 1969.

The original S&K store was open seven days a week, but only until 4:00 p.m. because that was when street parking was prohibited in downtown Richmond. “It really wasn’t a very good retail location,” Stuart Siegel told a reporter in 1993. “There was no parking [lot]. There wasn’t much walk-by traffic.” In another interview he recalled, “I would take a station wagon on Monday morning and leave town and drive south into North Carolina. I would come back on Thursday evening or whenever the station wagon filled, whichever came first. And we’d have that merchandise for the weekend.” Soon the junior Siegel, who became president of the firm in 1972, was flying to places as far away as Knoxville and Atlanta, stocking new S&K branches by renting U-Hauls and making dozens of buying stops while motoring back to Richmond. There were five stores when Hip Siegel died in 1973.

S&K started going big time in 1975, when Siegel bought 3,500 suits from Saks Fifth Avenue. There was no room for them in the stores, so he and assistant Donald Colbert—who rose to become president of the company—stuck them in the warehouse and offered them for half price, right out of the boxes. Even at 50 percent off retail, the firm was collecting a 40 percent markup. Within a week, three-quarters of the suits were sold, and S&K had garnered invaluable publicity. The enterprise soon made similar deals with other big retailers like Bloomingdale’s and Lord & Taylor. By the early 1980s, however, merchandise purchased directly from manufacturers was accounting for about half of S&K’s stock, and merchandise sold under the company’s own label had begun making an appearance.

By the time S&K went public in 1983, it was leasing 23 stores in Virginia and North Carolina, including ten Virginia sportswear stores under the Hip Pocket name. Net sales rose from $9.4 million in fiscal 1979 to $18.4 million in fiscal 1983. Net income rose from $297,000 to $1,997,000 during this period. The company’s long-term debt was $1,652,000 in September 1983, when it sold 30 percent of the common stock to the public at $10 a share, collecting $5.5 million, of which two-thirds went to selling shareholders. The company’s take went into opening new stores and expanding distribution facilities. A $4.5 million, 70,000-square-foot corporate headquarters and distribution center was completed in 1985.

Steady Expansion: 1985–92

By the fall of 1985 the S&K chain had grown to 34 stores in seven states, all under the S&K Famous Brands name except for one Deansgate Clothing Showroom in Pittsburgh. Value continued to be the company’s attraction for its customers. S&K was purchasing men’s suits and sports coats at the end of the fall and spring seasons from leading retailers and manufacturers and selling them the next season, usually at discounts of 30 to 50 percent. In 1986, however, it completed the sale—announced in 1985—of its Hip Pocket sportswear division, basically at no profit. The sale included 11 leased store locations in Virginia. Hip Pocket had been formed in 1972 as an exclusive outlet for jeans and tops from Levi Strauss & Co.

Notwithstanding the Hip Pocket sale, S&K’s appetite for expansion continued to be sharp. By early 1987 the company had 47 units (all S&K outlets) in 12 states, most of them in the South, but including three in New York. These stores generally were in neighborhood strip centers near shopping malls located in metropolitan areas of about 100,000 to 500,000 population. About 40 percent of sales volume was from reselling goods coming from leading retailers, especially Saks, Bloomingdale’s, and Lord & Taylor. Another 40 percent was from brand-name merchandise purchased directly from leading manufacturers. The remaining 20 percent was being produced for S&K under its own labels, primarily “Deansgate” for men’s suits and “Club Run” for dress shirts. To finance the expansion company long-term debt had risen to $12.6 million, but a secondary stock offering in August 1989 netted the firm $4.1 million.

S&K was still growing rapidly at the end of the summer of 1988, when it had 65 stores in 15 states, including two recently opened in Ohio. The company was upgrading its stores with tasteful colors and graphics to appeal to women as well as men. By early 1990 the number of stores had reached 92 in 19 states, stretching as far west as Wisconsin. Only two, however, were in major metropolitan markets: one in the Potomac Mills off-price mall in Dale City, Virginia, near Washington, D.C., and the other in suburban Philadelphia. Both were opened to take advantage of heavy traffic and mall-based advertising, which was keeping the company’s own advertising costs low.

S&K had 99 stores in October 1990, when it opened its first superstore, an 8,000-square-foot Richmond outlet that carried 2,500 suits and 1,500 sports coats as well as dress shirts, casual wear, tuxedos, and ties. The company was targeting middle managers ranging in age from 25 to 40. Its private-label merchandise now came to about one-third of its inventory. S&K had been averaging annual sales growth of 20 percent over an eight year period. In 1991 it opened a Tailors Row mall-format store in a Virginia regional mall and soon opened two more, in Syracuse, New York and Winston-Salem, North Carolina, also in regional malls.

In the fiscal year ended January 25, 1992, net sales reached a record $75.1 million and net income amounted to a record $2.9 million. There were 118 S&K stores when Siegel was named Distinguished Retailer of the Year in March 1992 by the Retail Merchants Association of Greater Richmond. S&K had been designated one of the 200 best small U.S. companies by Forbes for five consecutive years. Sales were now fully refundable, and store services included in-house alterations.

Given S&K’s concentration on markets ranking between 30th and 150th in size in the United States, store expansion was leading to clustering in areas where the company already had a presence. To a degree new stores in existing markets were taking sales from older stores, but the company gained efficiencies in operation, distribution of merchandise, and marketing. S&K was spending about six percent of its sales on TV advertising, typically buying 20 30-second spots a week in a given market during local and network news. The company was now debt-free and generating funds for store expansion from its own resources.

The Mega Center Concept: 1992–96

S&K opened its first Menswear Mega Center—a 22,000-square-foot, no-frills, warehouse-format store in a Fairfax County, Virginia, mall—just in time for the Christmas 1992 season. Six times the size of most of the company’s other 127 outlets, it did not carry marked-down clothing from big-name retailers and was open only Fridays, Saturdays, and Sundays, allowing the company to hire chiefly part-time help. A securities analyst said S&K knew the store would have been making most of its sales on weekends anyway, because most men’s suits were being sold then, when men and women shopped together. Women were said to be driving the purchase of most men’s suits. (Suits and sports coats were accounting for 53 percent of S&K’s sales in 1995.)

The advent of “dress down Fridays” did not bother Siegel, who pointed out to a Discount Merchandiser reporter in 1995, “The men’s tailored clothing business has been declining for over 10 years, but we have never failed to increase our business in those 10 years…. There are fewer people selling clothing…. Department stores are leaving the business, creating a great opportunity for us because they don’t offer much service or selection. We hang 1,000 suits in a store, and we offer sportswear, selling what we call ‘Friday wear.’” S&K ceased carrying apparel from other retailers in 1994 because virtually every brand-name manufacturer now would sell merchandise to the chain. Through a database of nearly one million names, the company had determined that its core customer was a married man between the ages of 30 and 55 making between $50,000 and $75,000 a year.

Company Perspectives:

S&K’s Mission is to be the nation’s leader in providing menswear value.

By the fall of 1993 S&K had opened three more Menswear Mega Centers, one in Rockville, Maryland and the other two in Chicago suburbs. Another Washington-area megastore was added later. Each was stocking 10,000 name-brand suits and sports coats, generally priced between $99.95 and $159.95. Also available were more than 7,000 silk neckties at $7.95, top-name dress and knit shirts, sweaters, and even shoes. But S&K announced in September 1995 that it would close the Chicago-area megastores by the end of the year, citing the high cost of advertising in this populous market. In August 1996 S&K announced it was closing the Washington-area megastores as well. “While the Menswear Mega Centers were not unprofitable,” said Siegel, the concept “simply didn’t give us the kind of returns we would have needed in order to grow it.”

With the elimination of what one securities analyst called an “albatross,” S&K continued to concentrate on expanding its core outlets. The number had reached 185 in 26 states at the time of Siegel’s announcement discontinuing the Mega Centers, and it passed 200 in 1997. Colbert said in May 1997 that the company expected to operate more than 300 stores by 2002, including some in Canada and Mexico.

Because of the establishment of new S&K stores, company sales continued to grow each year. In fiscal 1995, however, net income fell to $2.5 million from $4 million the previous year. Comparable-store sales fell by two percent. Management blamed “General softness in consumer demand for men’s clothing in the company’s trading areas, and to a lesser degree, lower sportswear sales than planned due to unseasonable weather.” Net income rose slightly in fiscal 1996, to $2.7 million, with comparable-store sales up four percent. Management cited strong suit sales but said sportswear and seasonal merchandise were below expectations. In fiscal 1997 net income reached a record $4.6 million, and comparable-store sales were up five percent. S&K’s long-term debt was $5.2 million at the end of the fiscal year. Siegel held 29.6 percent of the common stock in April 1997.

S&K’s Operations in 1996

In 1996 S&K was purchasing merchandise from a number of nationally recognized manufacturers, primarily placing orders well in advance of manufacturers’ production cycles, during off-peak periods. A number of manufacturers also were providing S&K with merchandise for company-owned labels such as Tailors Row, Deansgate, Roberto Villini, Club Row, and Johnny Bench. Substantially all of the merchandise was being received at the company’s Richmond distribution center for delivery to the stores once or twice a week, generally by the company’s own trucks.

All S&K stores were being leased. Most were east of the Mississippi, and none were as far west as the Rocky Mountain or West Coast regions. A total of 55 percent were traditional S&K stores of 4,000 square feet, generally located near regional malls in midsized markets; 31 percent were 3,500-square-foot outlet stores located within outlet centers and designed to attract the bargain shopper; and 14 percent were “superstores” of 5,000 to 6,500 square feet, with a much broader merchandise assortment, especially in tailored clothing. Some of these stores also had expanded “Corporate Casual” collections or “shop concepts” such as golf or formal shops.

S&K’s customer service included basic alterations at modest cost and a liberal refund policy for returned merchandise, including a money-back guarantee. S&K also was sponsoring a Premiere Club for repeat customers. Members received periodical mailings throughout the year, offering special promotion opportunities and free alterations for the life of the garments purchased.