Musicland Stores Corporation

views updated

Musicland Stores Corporation

7500 Excelsior Boulevard
Minneapolis, Minnesota 55426-4599
U.S.A.
(612) 932-7700
Fax: (612) 931-2013

Public Company
Incorporated: 1977 as The Musicland Group Inc.
Employees: 10,000
Sales: $1.02 billion
Stock Exchanges: New York
SICs: 3652 Prerecorded Records and Tapes; 5735 Record and Prerecorded-tape Stores; 5942 Book Stores

The leading specialty retailer in the United States of prerecorded music, movies, and audio and video accessories, Music-land Stores Corporation operates more than 1200 stores in 49 states, Puerto Rico, and the United Kingdom. These include approximately 870 Musicland and Sam Goody stores (selling prerecorded home entertainment products, primarily in suburban shopping malls); 300 Suncoast Motion Picture Company stores (selling video and video-related products, primarily in metropolitan shopping malls); some 30 On Cue stores (selling a variety of entertainment products in small town markets); and around 15 Media Play megastores (selling books, music, videos, and other products to select large-to-mid-size markets). Although launched as a small independent retailer during the 1950s, Musicland was virtually reborn in 1988 during a highly leveraged $410 million buyout from owner Primerica. The principals of the deal included Musicland chairman Jack W. Eugster and the Donaldson, Lufkin & Jenrette investment group. So successful was the 1988 buyout that in 1992 Musicland—still debt-heavy but now considerably expanded and margin-strong—was able to float an initial public offering of 16 million shares priced at $14.50 each in order to pay off senior debt and continue its ambitious expansion plans. With market share more than twice the size of its nearest competitor, the Musicland fold looked to a bright future in the 1990s. In his 1992 letter to shareholders, Eugster explained: “We see ourselves not only as industry leaders with the strength, discipline, energy, and organization to make the most of existing opportunities, but as industry pioneers willing to explore entirely fresh possibilities for growth. Our goal is to be the most complete multi-media retailer in the business.”

Musicland began humbly enough in 1956 with a single outlet near downtown Minneapolis. One of the founders, Terry Evenson, had opened his first music store in his hometown of Cloquet, Minnesota, while still a teenager some eight years earlier. Following a college education he helped fund by leading a dance band, Evenson served in the Korean War. He then resettled in Minneapolis and launched the Musicland business with partner Grover Sayre, a former member of his band. The partnership had grown to a chain of six stores by 1963, at which time Evenson and Sayre decided to sell their interest.

His entrepreneurial streak still alive, Evenson founded a sizable chain of greeting card stores, which he ultimately sold to Hallmark. Sayre, on the other hand, remained with Musicland until 1981. From 1963 until 1968, Musicland was the property of two St. Louis Park, Minnesota, brothers, Amos and Dan Heilicher. Veterans of record distribution since the 1930s, the Heilichers had supplied Evenson with prerecorded music since his early days in Cloquet. Musicland expanded rapidly to 48 stores under their management before the private concern merged with Pickwick International, a music and book production, distribution, and merchandising corporation based in New York with 300 retail outlets. The Heilicher brothers remained in the Twin Cities to head Musicland’s distribution and retailing divisions.

Then in 1976, according to Mike Langberg, “Amos Heilicher had a falling out with other members of the Pickwick board and sold his stake in the company.” The year after the break, packaging giant American Can (since renamed Primerica to reflect its diversification into financial services and other industries) purchased Pickwick for $102 million (Pickwick’s revenues for the year ending April 30, 1976, totaled $264.9 million). At this juncture Musicland appeared a clear leader in record retailing, with approximately 230 stores.

Unfortunately for Primerica, wrote Langberg, “the purchase of Pickwick was a classic case of bad timing. The recorded music business lurched into a long slide after 1978, while Primerica— with little knowledge of retailing in its top executive ranks— poured money into acquisitions of smaller record store chains and opening of new stores.” Some of the slide was due to the flash-in-the-pan music phenomenon of disco. The greatest factor, though, was likely the changing demographics of record buyers: baby boomers were no longer primarily teenagers, the largest record-buying group by age, but part of an older crowd fast approaching middle age.

From 1979 to 1983, Ted Deikel managed Musicland and Primerica’s other retailing concerns. Deikel’s foremost task was to restructure Pickwick and return it to profitability. It was to Eugster, hired in 1980 by Deikel, that the arduous job of reshaping an overexpanded Musicland fell. A former Dayton Hudson and Gap Stores retailing executive, Eugster took several predictable steps over the next few years, including closing more than 100 poorly located or unprofitable outlets and centralizing distribution to just two (rather than the previous 18) warehouses. In addition, he sought savings by taking the tiniest and least obvious of measures, including switching off back room store lights and shaving the number of paper bag sizes offered to the customer.

Eugster’s greatest contribution came with the introduction of a computerized inventory system that, according to Christopher Palmeri, “remains the standard in the record retailing business.” Called Retail Inventory Management (RIM), the two-way system tracked every individual item that left the St. Louis Park warehouse by means of a bar code similar to those for supermarket products. Computerized registers at each retail outlet then scanned the bar codes at the point of sale and relayed the information back to headquarters. The final step in the process involved a computer model that forecasted the optimum levels for all music and video products on a store-by-store basis.

In 1985, because of RIM and Eugster’s other managerial improvements, Musicland was back in the black. The transition had been complex and costly, though, for from 1981 to 1984 virtually all of the company’s non-retail operations (i.e., wholesale distribution and record production) were curtailed, even while American Can continued to buy up and merge smaller record chains into Musicland. Nonetheless, flush with revenues of $327.5 million and profits of $8.8 million, the subsidiary entered 1986 both comfortable in the knowledge that it was the nation’s largest music retailer and hungry for further expansion. In May of that year, plans to acquire California-based Record Bar / Licorice Pizza, a 60-store joint enterprise, for $13 million were announced. When completed, the deal would bring Music-land’s tally of stores to 512. Other major developments included the launch of Musicland’s first for-sale video specialty store (debuting as Paramount Pictures, Musicland’s movie division saw sales grow to nearly 7 percent of all corporate revenues within its first year). Then, in August, American Can announced its plans for an initial public offering of Musicland stock.

The offering was postponed until February 1987, when 19 percent of Musicland was sold by parent company American Can (that same year, American changed its name to Primerica). The IPO was particularly well received due to Musicland’s dominant market position and a new upsurge in record-buying among the thirty- and forty-something crowd. Consonant with this trend, Sam Goody, with its more upscale image and emphasis on new-age, jazz, and classical music, made its Twin Cities debut a year later. A discount record chain begun during the Great Depression, Sam Goody was bought by American Can back in 1978. Within ten years, the chain had expanded from 28 to 190 stores, most located either on the West or East Coasts. Next to the original Musicland chain, Sam Goody had become a primary contributor to the company’s overall revenues of more than half a billion.

Retailing trends, market dominance, high hopes for video sales, and other positive indices within Musicland’s divisions prompted Eugster and a group of fellow investors committed to the company’s long-term growth to pursue a daring leveraged buyout (LBO) in August 1988. When the ink was dry, Musicland’s new management had decreased Primerica’s ownership stake from 81 percent to just 20 percent and also reduced Primerica’s role to that of passive investor. Since that time, Musicland has continued its program of aggressive expansion, solidly outdistancing such competitors as Trans World Music, Wherehouse Entertainment, and Tower Records.

In July 1990 the company entertained plans of going public, believing it could raise as much as $96 million in interest-free capital. However, with the Iraqi invasion of Kuwait in August and the subsequent downturn in the stock market, the plan was scrapped. Due to the economic recession, Musicland saw its sales soften and profits stall along with those of other music retailers. “In late November [1991],” according to a January 1992 Star Tribune article, “some industry observers speculated that Musicland was hitting rough times when it ended negotiations to buy New York City-based Record World Inc., a chain of 80 music stores, from Chemical Banking Corp.” However, such speculation was quelled in February 1992 when Musicland extricated itself from LBO financing pressures by taking the company public in an enormously successful offering. A follow-up Star Tribune article from that month cited Ken Salmon, an analyst with C. L. King & Associates. According to Salmon, Musicland’s Wall Street appeal, despite both significant internal and external economic pressures, was that: “It’s bigger and slightly better in everything—whether it’s sales per square foot or operating margins—than any other music company out there. It was not an LBO under stress.”

Since the 1992 offering, Musicland has topped the $1 billion mark in sales and redefined itself as a conservatively capitalized company. In addition, holdings by the chief outside investors— Primerica, Donaldson, and Equitable—were cut by 30 to 60 percent. The largest remaining stockholder among the three, Donaldson, saw its interest drop from about 25 percent to 17 percent. In November 1992 Musicland reaffirmed its market-driving reputation by opening its first Media Play store in a suburban strip center in Rockford, Illinois. A 40,000-square-foot prototype (later Media Plays ranged up to 50,000 square feet) competitive with such discounters as Wal-Mart and such multimedia retailers as Kmart’s Borders Books & Music, the store is part of a new program to capitalize on the emerging trend of integrated media. “In the new megastore,” wrote Palmeri, “customers are encouraged to browse. There is a kids’ play section, easy chairs in the travel book section, a cafe in the center of the store... Eugster proudly shows visitors a slide that projects that by 1998 Media Play sales could equal those of the Musicland music stores, suggesting company-wide revenues in the neighborhood of $3 billion.”

Although Musicland also faced competition in this area from Virgin Retail, Blockbuster Entertainment, and Tower Records, it “appears to be moving faster and with a broader sweep than its most direct competitors,” according to a 1993 Wall Street article by Patrick Reilly. Interestingly enough, wrote Martin Pedersen, “With the Musicland and Sam Goody stores accounting for 8 percent of the industry’s total music sales, the opening of more Media Play outlets eventually will put the company in the unusual position of competing with itself. “If we don’t compete with ourselves,” Eugster commented, “somebody else will.”