Value City Department Stores, Inc.

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Value City Department Stores, Inc.

3241 Westerville Road
Columbus, Ohio 43224
U.S.A.
Telephone: (614) 471-4722
Fax: (614) 478-2253
Web site: http://www.valuecity.com

Public Company
Incorporated: 1991
Employees: 15,700
Sales: $1.67 billion (2000)
Stock Exchanges: New York
Ticker Symbol: VCD
NAIC: 44821 Shoe Stores; 44819 Other Clothing Stores

Value City Department Stores, Inc. operates several chains of off-price department stores. Its largest is the 120-unit Value City chain. Value City stores are unique in offering a huge array of discounted goods in a vast space. Stores are typically between 80,000 and 100,000 square feet, about three times larger than most other off-price competitors. Items at Value City retail for at least 30 to 40 percent below regular department store prices. The stores sell men’s, women’s, and children’s apparel, housewares, sporting goods, and other items. Much of the merchandise is purchased directly from manufacturers, and other goods are bought as overstock or from liquidations of other merchants. The stores offer leading brands as well as moderate and budget-priced lines. Value City also runs a chain of discount shoe stores called DSW Shoe Warehouse. Its roughly 60 stores sell brand-name shoes at lesser prices. Value City also runs the Massachusetts-based discount chain Filene’s Basement, and the St. Louis-based Grandpa’s chain. The company was formerly an operating division of Schottenstein Stores Corporation (SSC), a private firm run by members of the Schottenstein family. Schottenstein Stores was well known as a liquidator, specializing in buying up failing regional department stores. Value City is still led by a member of the Schottenstein family, and family members control about 60 percent of the firm’s stock.

Early Years

In 1991 Value City Department Stores was spun off from Schottenstein Stores Corporation (SSC). SSC began as a single store in Columbus, Ohio, opened by Ephraim Schottenstein in 1917. Schottenstein’s family emigrated from Lithuania and settled in Columbus in the late 1800s. Ephraim was apparently in the clothing business as early as 1909, and soon after he opened his store, E.L. Schottenstein Department Store. Ephraim Schottenstein had four sons, Saul, Alvin, Leon, and Jerome, and a daughter, Selma. The children all grew up working in the family store. One brother in particular, Jerome, was credited with orchestrating much of the growth of the corporation in later years. By the time Jerome was a teenager, he was taking trips to New York and making buying decisions for the store. Jerome became an executive in Schottenstein Stores in 1946. By the early 1950s, the Schottenstein retail empire encompassed only the original Schottenstein store and several furniture stores. But at that time the company began to get involved in the liquidation business, bidding on the merchandise of failing area stores. From liquidating merchandise, the company moved to acquiring bankrupt businesses. In 1963, Schottenstein Stores acquired a failing store in Dayton, Ohio, called Concord City, and the next year it bought another struggling store, Elyria City, in Elyria, Ohio. Then in 1966 the Schottenstein family acquired a store named Value City, in Independence, Ohio. The family business continued to buy up bankrupt stores, and it gave them all the Value City name. This name conveyed the prime message of the stores, which was to sell at budget prices.

Growth As a Liquidator in the 1970s and 1980s

Jerome Schottenstein became president of Schottenstein Stores Corp. in 1972. He went on to become an almost legendary figure in retailing: he was expert at buying liquidated merchandise, and equally astute at turning around failing stores. The Value City chain grew in the 1970s by taking over floundering regional chains and reopening them profitably. Some were closed and reopened under the Value City name, while others SSC funded and gave management assistance in exchange for a percentage of the business. SSC turned around bankrupt chains such as Valley Fair/Widmann in New Jersey and Levine’s in Texas. Most of the company’s operations centered in the Midwest, in relatively small towns within 250 miles of Columbus. The company owned extensive real estate in and around Columbus, Ohio, where the firm was headquartered. But Jerome Schottenstein sometimes roamed far afield in looking for juicy liquidations. In the early 1980s he bought and sold the discontinued product line of flamboyant and bankrupted car maker John DeLorean. Schottenstein also sold overstocked Fiat cars. He was involved in the operation of an air freight company in Singapore, though he had never been to Singapore. While most of the Value City stores operated in relatively small towns such as Lima, Ohio, Schottenstein Stores Corp. also bought chains in big cities, such as Wieboldt’s, in Chicago. By the early 1980s, Schottenstein Stores was still tightly controlled by the Schottenstein family. The Value City chain had grown to around 35 stores, and it pulled in about $250 million annually. The company’s furniture division, Value City Furniture, was one of the leading furniture retailers in the country. SSC also ran a chain of lawn and garden stores in the Philadelphia area; a drug and beauty aid chain; a chain of auto supply stores, and it also had a 50 percent interest in two mall-based apparel chains, Silverman’s and American Eagle. The entire Schottenstein retail enterprise was estimated to bring in $600 million a year.

Public Company in the 1990s

The Value City chain expanded through the Midwest in the late 1980s. It opened nine stores in 1989, and then six more in 1990, bringing the total to 53 stores in 11 states. Sales and earnings rose annually in the late 1980s. Sales of $537.8 million in 1990 were over 25 percent higher than the year previous, and operating profits too rose more than 20 percent. In mid-1991, Schottenstein Stores Corp. announced that it would take its Value City division public, offering a 25 percent stake in the business. The money raised would be used to retire debt. Value City’s initial public offering went over well. Off-price retailing was seen as a smart trend, and Value City found eager investors. The stock price quickly rose by almost 90 percent, and the company soon declared a 2-for-1 stock split. The Schottenstein family still owned three-quarters of the new company’s stock, giving it controlling power, and Jerome Schottenstein led Value City as chairman. His son Jay was vice-chairman and chief operating officer.

Jerome Schottenstein died in March 1992 of cancer at age 66. His son Jay, then 37, became chairman and CEO of Value City Department Stores, Inc. Jay had worked for SSC since 1976, and had been vice-chairman since 1986. He had worked closely with his father, and been responsible for much of the day-to-day business. Under his leadership, the Value City chain continued to expand as anticipated. Amid a generally flat retailing environment, Value City posted sales and earnings gains, and the company continued to open new stores. In 1992 it acquired a chain of 15 Gee Bee stores based in Johnston, Pennsylvania. Gee Bee was a struggling chain picked up by SSC in 1990. Value City took over the stores and converted most of them into Value Cities. The Value City formula seemed to make it stand out even as the market filled with other discount chains such as Marshall’s, T.J. Maxx, and Filene’s Basement. A writer for Discount Store News described Value City stores in an October 5, 1992 article as “an off-price, value-driven mall, a collection of specialty stores, under one roof.” The stores were so big, and with such a variety of merchandise, that they attracted shoppers from all income levels. While some of the goods were genuinely inexpensive, some of the bargains Value City offered were top-of-the-line brand name items including men’s suits and raincoats. These sold for hundreds of dollars, which was still hundreds of dollars less than department stores charged. Thus it was not just consumers on tight budgets who were attracted to the stores. A native of Columbus familiar with the store described shopping there in a September 28, 1992 Forbes article as “more like a sport than ordinary shopping.” He claimed it was currently trendy among the city’s affluent to dig for bargains at Value City.

Given the success of its IPO and its apparently excellent retailing strategy, the chain laid plans for major growth. Already by early 1993, the Value City chain boasted 79 stores and sales of around $870 million; management foresaw hitting the $1 billion mark soon. Over the next ten years, management planned to open a minimum of five to seven stores a year, and company planners expected sales to eventually hit $2 billion.

Company Perspectives:

Value City is striving at all levels to become the industry leader in all measures of performance. Management recognizes that achieving these goals requires a commitment to customers and to all associates. Success depends on attracting and retaining quality people. Training, development and recruiting are the highest priorities.

Yet by 1995 the story was a little different. Apparel, which accounted for about two-thirds of Value City’s sales, was stagnant, and company analysts struggled to come up with a corrective strategy. The company had problems getting a new distribution center up and running, the market was considered flat in any case, and exceptionally warm weather in the fall of 1994 further depressed apparel sales. This led to a steep drop in earnings. The company looked at ways to make its stores friendlier, to advertise more effectively, and to move more goods from the back room onto the selling floor. Company executives reiterated that Value City had a great retail strategy. The firm’s senior vice-president told the Daily News Record on November 3, 1995 that the chain was depending on its buyers being “sharper and closer to need” in order to get Value City cooking again. Despite difficulties, the chain continued to expand, moving mostly eastward. It opened stores in Atlanta, Georgia, and Charlotte, North Carolina, in 1995, and in 1996 opened nine stores total, including stores in New Jersey and Washington, D.C. Though the chain had long been suited to smallish towns, it expanded in Chicago and in suburbs of Philadelphia and St. Louis. All the stores the chain opened were not the same. The merchandise mix was specifically targeted to certain buying groups. A Paramus, New Jersey store, for example, was filled with pricier and more sophisticated goods, while others in less trendy urban markets were designated as “moderate” or “budget” stores overall. The chain’s advancement continued as the firm bought up struggling regional merchants. Its new Philadelphia stores, for instance, were remodeled from units of a chain called Clover.

By the late 1990s, Value City had grown to a chain of over 90 stores. But the growth had come at a cost. By 1997, Value City was in a slump that had lasted for many months and sent earnings spiraling down. Same-store sales growth was under 1 percent monthly, and inventory piled up. In late 1997 Value City hired a turnaround artist, Martin P. Doolan, to take over as president and chief executive, temporarily setting aside Jay Schottenstein and former president George Iacono. Doolan brought in a team of new executives, and set to work refocusing Value City’s apparel buying. Some stores were slated for renovations, which included wider aisles, new carpeting and signs, and a way of grouping goods by category rather than brand name. The company also began offering more services to its customers, such as automated teller machines in the stores and promotional incentives to its store credit card holders, and upped the discount its employees received on purchases, from 10 to 20 percent.

By the fourth quarter of 1998, the company had survived its red ink period. Doolan had refocused the store on branded goods, and he attributed that shift to the company’s returning fortunes. What Doolan called “good brands” had grown over his tenure from 15 percent of sales to over 60 percent. Most stores were renovated. The chain had halted its new store openings for fiscal 1998, but resumed its expansion with several new openings in the Southeast in 1999. Sales for 1998 reached $1.16 billion, and the company also made a new acquisition, buying up a shoe retailer called Shonac Corp. in May. A year later, the picture looked even better. Earnings increased dramatically, and the firm made several more strategic acquisitions. Value City took over eight stores from the Crowley’s chain, which was in bankruptcy proceedings, giving it five stores in Detroit and three in Connecticut. Later in 1999, Value City acquired the inventory of the bankrupt Starter Corp., a maker of athletic outerwear. Value City also purchased a chain of 14 discount stores in the St. Louis area, Grandpa’s. The company planned to reopen them as Grandpa’s Value City.

In 2000, Value City paid $16.1 million in cash and stock for the Filene’s Basement chain. Filene’s Basement was a rival discounter which had had its IPO at the same time as Value City’s. The Wellesley, Massachusetts-based chain had at first been quite successful, growing to over 50 stores. However, by 2000 Filene’s Basement had started to shut its stores and enter bankruptcy proceedings. Value City intended to sell off one part of the purchase, a chain of warehouse stores called Aisle 3 Filene’s operated, and to revive Filene’s under new management. Value City began reopening some of the shuttered Filene’s within months of the purchase, and it claimed it could bring the chain back to profitability within a year. With steadily growing sales and a stabilized earnings picture, Value City in the early 2000s seemed to be furthering its earlier pattern of success. It continued to expand across the country, using its tested strategy of buying up other bankrupt regional chains.

Principal Subsidiaries

Filene’s Basement Corp.; Base Acquisition Corp.

Principal Competitors

Melville Corp.; TJX Co.

Key Dates:

1917:: Ephraim Schottenstein opens first store.
1946:: Jerome Schottenstein joins Schottenstein Stores as executive.
1966:: Schottenstein Stores buys Value City store, and utilizes this name for subsequent purchases and resuscitations of bankrupt stores.
1991:: Value City is spun off from Schottenstein Stores Corp. as public corporation.
1992:: Jerome Schottenstein dies; son Jay takes over as CEO of Value City.
2000:: Value City buys Filene’s Basement chain.