Schottenstein Stores Corp.

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Schottenstein Stores Corp.

1800 Molar Road
Columbus, Ohio 43207
U.S.A.
(614) 221-9200
Fax: (614) 443-5810

Private Company
Founded: 1917
Employees: 15,000
Sales: $1.2 billion (est. 1994)
SICs: 5311 Department Stores; 5712 Furniture Stores; 5331
Variety Stores; 5399 Miscellaneous General Merchandise
Stores

In its third generation under family management, Schottenstein Stores Corp. (SSC) ranks among the 250 largest private enterprises in the United States. In 1995 the family, led by 40-year-old Jay L. Schottenstein, chairman and chief executive officer, controlled over 92 percent of this retail department store company’s equity. The firm spun off about one-third of its largest and best-known division, Value City Department Stores, in June 1991. By 1994 this unit alone boasted $864.9 million in annual sales, having achieved annual same-store revenue increases in spite of a U.S. recession during the late 1980s and early 1990s. Other Schottenstein interests included the Value City Furniture chain (with over 60 stores), four Schottenstein Department Stores, real estate holdings, Shiffren Willens jewelry stores, and Sara Fredericks boutiques.

Opportunism has long been a key to Schottenstein’s retailing success. Historically, that meant the family’s knack for spotting and taking advantage of retail liquidations. Ephraim L. Schottenstein, a Lithuanian immigrant, settled in Columbus, Ohio, and established this family tradition in the late nineteenth century. The patriarch got a modest start, buying overstocked and outdated goods from local retailers and selling them out of a horse and buggy. Within a few years, Schottenstein had worked up the “critical mass” to open his first shop. He launched his namesake department store in 1917. Ephraim was the patriarch of a family that would become known as “some of retailing’s sharpest operators.”

The business was nurtured by a second generation of Schottensteins, brothers Jerome, Saul, Alvin, and Leon. Not coinciden-tally, they joined the business just as the discount retail industry began gaining steam in the late 1940s. Jerome established a reputation as a hard worker while still in his teens. A 1992 retrospective in Discount Store News noted that he started “making buying decisions for the chain at an age when most of his peers would be going out on their first date.” Known throughout the industry as “Jerry,” he joined the executive ranks of the four-store Schottenstein chain in 1946 at the age of 20 and advanced to chairman and CEO in 1972.

Jerome directed the pivotal 1962 acquisition of Value City Stores, which had been established in 1909. According to a 1992 article in Forbes, Ephraim forbid the application of the family name on any store open on Saturday, the Jewish Sabbath. As a result, the Value City chain kept its name.

Led by Jerry, the Schottensteins earned a nationwide reputation as “pioneers of the retail liquidation industry” and “professional liquidators” by engineering buyouts of infamous failures. Perhaps the best-known example of the Schottenstein technique was the 1980 acquisition of E.J. Korvettes’s entire 31-store inventory. Once a mighty budget retailer, Korvettes had suffered years of mismanagement before going bankrupt. Through an affiliate, M.H. Fishman & Co., Jerome Schottenstein purchased merchandise with a retail value of $58 million for $25 million and managed Korvettes’s going-out-of-business sales. Known for his intuitive dealmaking, Schottenstein also participated in the much-publicized liquidation of 2,500 cars from the ill-fated DeLorean Motors enterprise.

That corporate culture of opportunism was reflected in Value City’s oft-praised purchasing department. The chain’s three dozen buyers averaged over a decade of experience each, a quality that helped earned them the personal connections vital to off-price and closeout buying. Vendors trusted the chain not to abuse their invaluable brand names. The Value City stores, which at 80,000 square feet were two to three times larger than other off-pricers’, allowed for bulk purchasing and a wider variety of merchandise. Selection was so vast that Tony Lisanti, editor of Discount Store News, characterized Value City as “an off-price, value-driven mall, a collection of specialty stores under one roof.” This dealmaking allowed Value City to sell national branded merchandise at substantial discounts (40 percent to 70 percent) from department store prices. More than one analyst likened the Value City shopping experience to a “treasure hunt.”

The chain’s influence in the off-price and closeout segment of retailing expanded quickly in the 1970s and 1980s. Value City set itself apart from competitors like TJX Companies’ TJ Maxx, Mellville Corporation’s Marshall’s, Filene’s Basement, and MacFrugals by offering both closeout and off-price merchandise lines under one roof. These two classes of discount merchandise can be distinguished by both the types of goods and the manner by which they are procured. The off-price category refers to soft goods, generally apparel, that are acquired at a discount by the retailer after the beginning of a fashion season. The term “closeout” generally applies to discontinued hard goods that are discounted by the manufacturer for quick sale.

About 60 percent of Value City’s merchandise was apparel, 25 percent of the offerings were hard lines (including housewares, toys, and jewelry), and the remaining sales were generated through leased departments selling shoes and health and beauty aids. The chain was also distinguished from some of its competitors by its emphasis on high-quality brands, which constituted about one-fourth of VCD’s merchandise. Only one-fourth of the chain’s offerings were described as “budget quality.”

Another, less obvious contributor to Value City’s success has been technology. Computerized inventory controls, including electronic registers, bar-coding systems, and point-of-sale scanning, have helped this and other chains achieve peak efficiency by shrinking inventories, accelerating turnover, and reducing lead times. Automated distribution centers incorporated highspeed sorters and radio communications to enhance efficiency. Value City’s internal computer network permitted “micro-marketing,” the tailoring of merchandise offerings for each individual store.

Schottenstein Stores Corp. grew along with the off-price discount segment throughout the late 1980s. According to a report prepared by the NPD Consumer Purchase Panel and cited in Women’s Wear Daily in 1992, “off-price discounters gained about 56 percent of the total apparel market from 1985 to 1991, which translated into sales of about $7 billion.” By 1989 SSC’s 47 stores generated an estimated $771 million in annual sales.

In the spring of 1991 SSC offered a 25 percent stake in the Value City chain to the public. The stock sale, which forced the Schottensteins to publicize the financial records of their largest retail interest, raised $72.7 million for debt reduction and allowed the family to maintain its control of the board of directors and its executive positions. Before the year’s end, a second stock flotation raised another $21.4 million for debt reduction. The shares, which initially sold for $19 each, rose to $50 before a 2-for-l split in 1992.

But according to Forbes, a third stock flotation in April 1992 “flopped” because of investor concerns over conflicts of interest between SSC and Value City. The most obvious of these was the fact that the proceeds of the $50 million stock offering were intended to finance Value City’s acquisition of GB Stores, Inc., a 13-store chain purchased by SSC in 1990 from the founding Glosser brothers. Moreover, SSC’s 50 percent-owned Shonac Corp., which operated licensed shoe departments in Value City stores, generated another source of conflict. In the face of the failed stock offering, Value City took on new debt to retire $25 million in GB Stores debt and reimburse SSC for $23 million in assets. The GB units were slated for conversion to the more successful Value City format.

In 1991 SSC completed the acquisition of Retail Ventures Inc., the Pennsylvania-based operator of the 150-store American Eagle Outfitters chain. The concept featured private-label out-doorwear, footwear, and accessories. Founded in 1977, Retail Ventures had over $100 million in annual sales by the time SSC assumed full ownership. SSC had taken a 50 percent stake in the chain as early as 1980, when the founding Silverman family encountered a fiscal dilemma. Jay Schottenstein assumed the presidency of the division. Although most of the chain’s units were located in the East and Midwest, Retail Ventures also had a nationally distributed mail-order catalog.

Jerry Schottenstein succumbed to cancer March 10, 1992, at the age of 66. According to a March 16, 1992, story in Business First — Columbus, the hard-driving executive was “working in his office on the morning of the day he died.” The family business mantle fell to son Jay L. Schottenstein, who had worked at the company since 1976 and eventually advanced to the board of directors in 1982 and a vice-chairmanship in 1986. Saul Schottenstein, the only surviving member of the second generation, stayed on as SSC president. George Iacono, who had come to SSC from Marshall’s in 1984, advanced to the posts of president and general merchandise manager of Value City.

In the years following its partial spin-off, Value City and its executives generally garnered high praise. In 1992 Fortune noted that “Value City seems impermeable to the soggy retailing climate.” Whereas most retailers were happy to tread water, Value City swam strongly forward, reporting same-store sales increases of ten percent. Under the slogan “Better Living for Less,” the chain’s sales doubled from 1987 to 1992, when they topped $600 million.

The chain also bucked a mid-1990s “retrenchment” in the off-price segment. “Off-pricers’ market share hit an historic high of 12 percent of all women’s apparel sales in 1994, compared with an estimated 11.4 percent in 1993,” according to Isaac Lagnado, publisher of Tactical Retail Monitor. Although such stalwarts as Filene’s Basement and TJ Maxx faltered when traditional department stores began to meet the off-price challenge, Value City’s sales and operating profits continued their seemingly inexorable climb. In 1995 analyst R. L. Rotter gushed, “If there is such a thing as a’Category Killer’ in off-price and close-out retailing, VCD must be it.” In anticipation of expanding the chain to 100 stores, the company built new distribution centers for its hard and soft lines in the early 1990s. Value City planned to open three new stores in the suburbs of Detroit, Chicago, and St. Louis by the end of 1995. Executives set their sights on surpassing the $1 billion mark by the turn of the century.

SSC revisited the public financial markets in 1994 with the sale of about 40 percent of American Eagle Outfitters Inc. to the public. The chain had suffered back-to-back losses totaling over $14 million in 1991 and 1992 but made operating income of $7.5 million on revenues of $168 million in 1993. Late in 1994 an SSC affiliate bought the 26-store Steinbach Inc. chain of department stores. Although terms of the acquisition were not publicized, it was known that Steinbach had revenues of approximately $225 million in 1993.

Several factors point toward a bright future for Schottenstein Stores Corp. and its affiliates. The firm’s heritage of market savvy, both in terms of merchandising and corporate acquisitions, appears to be continuing under the direction of the newest generation of leadership. The company’s commitment to discounting also seemed well placed in a consumer culture intent on quality and value. Finally, SSC’s strategy of selling minority interests in its affiliates allowed the company to raise money for debt reduction and future acquisitions without relinquishing Schottenstein family control.

Principal Subsidiaries

Gee Bee Department Stores; Hochs-child Value City Corp.; Schottenstein Stores Corp.; Discount Housewares; Shiffren Willens Jewelers Inc.; Steinbach Inc.; Valley Fair Corp.; Value City Furniture.