Strouds, Inc.

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Strouds, Inc.

780 South Nogales Street
City of Industry, California 91748
U.S.A.
Telephone: (626) 912-2866
Fax: (626) 913-4841
Web sites: http://www.strouds.com; http://www.linenexperts.com

Public Company
Incorporated: 1987
Employees: 1,637
Sales: $227.6 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: STRO
NAIC: 442299 All Other Home Furnishings Stores

Strouds, Inc., “The Linen Experts,” is a specialty retailer that offers a wide selection of home textiles for bed, bath, and tabletop in a large array of colors, styles, patterns, brands, and prices. The product line comprises the company’s private label brands, Joyce Stroud Collection and JS Relaxed, popular brands, such as Fieldcrest, Martex, Wamsutta, Croscill, and Springmaid, and designer collections, such as Adrienne Vittadini, Laura Ashley, Fendi, Alexander Julian, Collier Campbell, and Palais Royal. Specializing in quality linens at competitive prices, Strouds also offers complementary home accessories, such as pillows, window coverings, and picture frames, and some stores sell home furnishings.

Innovation Fosters Success

Wilfred “Bill” Stroud began the Strouds chain of linen stores in 1979 based on his perception that a niche existed for bed and bath specialty retail stores. Experience had taught Stroud, then a divisional merchandising manager for Broadway Department Stores in California, that when a department store reduced its inventory in a particular department, specialty retailers entered the market to fulfill customer needs. As a merchandise manager at various times for records, sporting goods, and toy departments, Stroud had seen that specialty retail stores thrived when department stores trimmed inventory in those areas. After he had been asked by corporate executives to reduce the company’s selection of linens, Stroud saw an opportunity for a specialty retail store to sell home textiles.

Knowing that selection attracted consumers to specialty retail stores, Stroud decided to create a store that would provide a broad assortment of bed, bath, and table linens. To fund the business Stroud accumulated $500,000 from a second mortgage on his home, his pension plan, and friends willing to invest in his idea. With the involvement of his wife, Joyce, and his son Jeff, Stroud planned two stores in the Los Angeles area to take advantage of cluster marketing. Strouds Linen Warehouse, a 4,400-square-foot store with a basic interior and unfinished wood shelves, opened in Pasadena, northeast of central Los Angeles, in November 1979. A 6,100-square-foot store opened in Torrance, south of Los Angeles, the following month.

Finding that its customers sought high-quality merchandise, Strouds quickly adapted to serve an upscale market. The company upgraded the atmosphere in its stores and added high-end merchandise and a skilled sales staff, dubbed “Linen Experts,” to assist customers with selection and coordination of linens and accessories. A library of informational brochures about specific products assisted both sales staff and customers. Store-level flexibility allowed managers to offer styles appropriate to each store’s customer base. At the Pasadena store customers preferred traditional styles, while the Beverly Hills store attracted customers with more progressive taste.

The pricing strategy, to offer merchandise at “White Sale” prices every day, made linen suppliers uneasy about selling to Bill Stroud, in part because department stores discouraged vendors from selling the same merchandise offered in their stores to retailers who sold it at a lower cost. Department stores did not offer the same array of choices, however, and the success of Strouds stores changed the attitudes of linen vendors. They liked the fact that Strouds offered a complete selection of merchandise presented in attractive “vignettes,” a Strouds innovation that showed how different items worked together and how decorative accessories completed the look of a room.

Visual presentation became the hallmark of Strouds linen stores, as the company adapted its product displays according to the way customers shop, by style and lifestyle rather than by brand. “Vignette” displays included full-sized beds dressed with complementary linens and accessories, regardless of brand, taking an interior decorator approach to merchandise presentation. The company used neutral colors as a background in order to emphasize the patterns and colors of the merchandise. Strouds stores also displayed towels and linens by color rather than by brand. “Cross-merchandising,” which presented items as they would be used together in a room, such as the display of shower curtains near towels of complementary colors, stimulated strong average sales per transaction.

Within five years Strouds had expanded to a chain of 16 stores throughout southern California, as well as three stores in northern California and one store in Las Vegas. Sales reached $28.8 million in 1984 and continued to grow with new store openings. The company grew more slowly as the California economy slowed and capital funding diminished. Strouds opened only two stores in 1985 and no stores in 1986. Five new stores in 1987 and two stores in 1988 were all located outside of Los Angeles, in areas where the economic downturn had the least impact. Bill Stroud attained industry recognition in 1986, when Home Furnishings Daily recognized Stroud as one of the top ten innovators in the retail of bed, bath, and table linens, and in 1987 when the National Bed, Bath and Linen Association elected Stroud, “Chain Store Retailer of the Year.”

The 1990s: Superstores, Outlet Stores, and Competition

Strouds began development of its first superstores and clearance outlet stores in the late 1980s. In December 1988 the company expanded its Northridge store in the San Fernando Valley to 11,900 square feet and in January 1989 opened a new 8,900-square-foot store in Thousand Oaks, northwest of Los Angeles. Superstores provided a wider selection of merchandise, from 25,000 to 30,000 stock-keeping units (SKUs), and allowed space for 50 to 80 vignettes, including 12 to 15 beds. With the opening of a 16,000-square-foot superstore in Pasadena in June 1989, Strouds converted the original Pasadena store into a clearance store. The company’s Downey location, southeast of central Los Angeles, had been converted to a clearance store in 1985 and had proven worthwhile as an outlet for slow-moving merchandise, odd lots, discontinued styles, and low-priced brands and styles. This alternative format allowed Strouds to broaden its customer base while providing an outlet for the superstores where Strouds continually offered a fresh selection of styles and colors. By the end of 1989, three new superstores had opened in the San Francisco Bay area and an 18,600-square-foot superstore opened in Orange, in Orange County. Strouds ventured outside of California with a second store in Las Vegas, which opened in October 1989.

In the early 1990s Strouds gained momentum. In southern California, Strouds expanded eight stores into superstores, while eight new superstores opened, including the 20,600-square-foot Beverly Connection store in June 1990. Three of the new superstores replaced original stores, which were converted to outlet stores. Also, four new outlet stores opened under the name Strouds Linen Outlet. Four new superstores opened in northern California and five stores were expanded to superstores, including the San Mateo site, which was the company’s largest store at the time at 25,600 square feet. Strouds expanded its original Las Vegas location to 20,900 square feet.

By the time Strouds went public in 1994, the company owned and operated 33 superstores, nine original stores, and seven outlet stores, for a total of 49 stores with $174.3 million in sales in fiscal year ending February 1995. The public offering of 3.3 million shares, at $12.50 per share, raised $37 million for debt payment and further expansion. With Wayne Selness as its new CEO, Strouds planned to enter the Midwest, opening two stores in Illinois and two in Minnesota in 1994 and 1995. Strouds also opened two superstores in Maryland, becoming the second largest retailer of home textiles in the United States, with 61 stores and $189.8 million in sales in 1995.

Increased competition in the home textiles and accessories market led Strouds to broaden its product offerings. Linens ’N Things, the largest national home textiles chain, and Bed, Bath and Beyond had entered the California market with a wider range of products, while national departments stores and West Coast chains, such as Pacific Linen and Three-D Bed and Bath, also intensified competition. Strouds began to experiment with decorative accessories that complemented its linens. The company offered metal beds, lamps, wall art, and other items that integrated well into its vignettes. A new kitchenware department introduced dinnerware, cookware, cutlery, and other kitchen items.

Strouds stores tended to be smaller than its competitors’, averaging 15,000 square feet compared to its competitors’ 30,000 to 45,000 square feet. New Strouds stores outside of California tended to be larger than the company norm at around 25,000 square feet. Within California Strouds responded to the competitive threat with an experimental prototype for a 50,000-square-foot home decorating store, called the “Home Compass,” which opened in Irvine in December 1996.

Company Perspectives:

The breadth and depth of linen category merchandise exceeds what is generally available in department stores, and is greater than what is in most other specialty stores. Strouds offers a wide assortment of brands, styles, colors, patterns, and prices designed to attract a broad range of customers. Additionally, all Strouds employees are trained to be “Linen Experts” to assist customers in making informed merchandise and decorating decisions.

The Home Compass concept involved a mixture of textiles, furniture, and accessories for each room of the house, displayed in an unstructured, circular pattern. In addition to bedroom and bathroom vignettes, merchandise displays included kitchens, dining rooms, and living rooms that reflected casual to formal lifestyles. Living room merchandise proved to be the company’s largest addition, with a large selection of furniture as well as area rugs and window treatments in 14 different vignettes. New merchandise included an expanded line of infant and juvenile bedding, as well as cribs and dressers. The store included a demonstration and seminar room, a cafe and gourmet foods area, and a “garage sale” area for markdowns and special promotions. Services in the Home Imagination Center included luxury linens by special order, a bridal registry, two professional decorators available for consultation at a customer’s home, and custom services for upholstery, carpeting, closet storage, window treatments, replacement windows, and vinyl siding.

Competition and the higher costs of the large store format sent Strouds’ profitability downward, and lower sales per square foot resulted in the company’s first annual loss—of $22.8 million—in 1996. The company took a pretax charge of $16.3 million for fiscal year ending February 1997 and announced a restructuring plan in April 1997. Before the plan could be implemented, CEO Wayne Selness resigned. Bill Stroud stepped in as CEO until July 1997 when the company hired Charles Chinni, a former merchandising executive for Macy’s and Kmart.

Return to Basics in the Late 1990s

Under Chinni’s leadership, Strouds addressed profitability. Behind the scenes the company streamlined various distribution functions, inventory management, and vendor returns of defective goods, reducing per unit supply chain costs. The company also eliminated several layers of management, including four executive positions, to streamline its staff expenses. Strouds reoriented its expansion strategy to reinforce its California market. The company suspended out-of-state expansion and, in 1997, 1998, and early 1999, closed seven unprofitable stores in Chicago, Minneapolis, Washington D.C., and Nevada, as well as two California stores. The strategy for new store openings involved market clustering near existing stores, store expansion, and relocation of stores in alignment with demographic shifts. In 1998 Strouds opened a 17,000-square-foot store in Monterey and an outlet store in San Jose.

The most significant change involved a restored focus on the company’s traditional strength as a home textile retailer. Strouds reduced and revised its merchandise categories and reduced its number of product vendors from 200, who supplied 85 percent of the company’s goods in 1996, to 40 vendors who supplied the same percentage in 1998. Strouds also reduced its store size appropriate to streamlined merchandise categories and economic efficiency, while upgrading visual displays. The company updated its ’ ’Linen Experts” program to provide sales staff with current information on products and fashions. A shift in marketing, from television to print advertising and direct mail, allowed Strouds to spend less on advertising while promoting the company more frequently to targeted markets.

The restructuring plan succeeded as new store openings maintained increases in yearly sales. In 1997 sales of $221.8 million still resulted in a net loss of $3.8 million, but in 1998 Strouds began to rebound with net income of $214,000 on $227.6 million in sales. Strouds attributed strong improvements in store-level sales to more frequent promotions, fewer store openings by competitors, and a strong economy. Company management was pleased that Strouds was one of three home textile retailers chosen to sell the new Guess? Home Collection.

With the company’s return to profitability, Bill Stroud retired as Chairman of the Board in February 1999. In April of that year the Home Fashions Products Association and the New York Home Textiles Show honored Stroud with a Retailer of the Year Award. With 65 stores at that time, Bill and Joyce Stroud had built the third-largest bed and bath retail company in less than 20 years. Stroud was noted for fairness and integrity in dealing with vendors, as well as for sponsorship of the annual Strouds Golf and Tennis Classic, which had raised over $2 million for the American Heart Association since 1989. Mark Grand, who had held various executive positions with Strouds from 1987 to 1995, received the Outstanding Merchant Award.

In 1999 Strouds began to explore a variety of new strategies for broadening its customer base. The company launched an online mail-order program at www.linenexperts.com in May 1999. Strouds sought to reach beyond its mature, over-40 customer, whose preferences range from the moderately priced to luxury merchandise, to attract younger consumers with new styles and lower-priced merchandise. The company also explored the concept of boutiques, from 5,000 to 6,000 square feet, which would offer top-quality linens. Strouds expected to locate the boutiques in shopping malls anchored by upscale department stores such as Nordstrom or Bloomingdales.

In September 1999 a prototype for a new small-store format opened in Thousand Oaks. The 9,900-square-foot store retained Strouds’ superstore selection with a more efficient, upscale, merchandise display. The format differentiated Strouds from its main competitors, who tended to focus on different merchandise categories or on different geographical markets. The Home Compass concept store would continue to be an experimental laboratory for new product categories.

In November 1999 Strouds announced plans to open four stores in the Phoenix area, which would be the company’s first foray outside of California in over three years. A store planned for Paradise Valley would offer a wide selection of goods for bed and bath at low prices as well as an upscale assortment of fashion bedding and decorative accessories. Strouds planned three outlet stores, in Scottsdale, Glendale, and Phoenix. In a press release announcing the expansion into Arizona, Chinni described the company’s status: “Renewed by the completion of our restructuring, we are now well positioned to compete in an industry we helped create.” Chinni completed a series of executive appointments to support the company’s renewal, including Robert Menar as Chief Operating Officer and Harry Brown as Executive Vice President and General Merchandising Manager.