Ames Department Stores, Inc. History

Address:

2418 Main Street
Rocky Hill, Connecticut 06067
U.S.A.

Telephone: (860) 257-2000
Fax: (860) 257-2168

Public Company
Incorporated: 1962
Employees: 36,400
Sales: $2.51 billion (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: AMES
NAIC: 45211 Department Stores

Company Perspectives:

The Ames mission is to provide quality products for family and home at discount prices; provide a convenient and efficient shopping experience; achieve a sustainable competitive advantage; build and sustain strong supplier partnerships.

Company History:

Ames Department Stores, Inc. is one of the largest discount retailers in the United States, with more than 450 stores located in 19 contiguous northeastern, midwestern, and Mid-Atlantic states. The stores sell brand name and other quality merchandise at discount prices, from locations in rural communities, small cities, and suburbs of metropolitan areas. After decades of profitability and steady growth, an acquisition spree in the 1980s--highlighted by the 1988 purchase of 392 Zayre stores--coupled with a downturn in the economy of its core states, drove the company into bankruptcy. After shedding more than half its properties, Ames emerged from bankruptcy in December 1992 and soon returned to profitability. The company has since focused on targeted expansion, most notably the December 1998 acquisition of 155 Hills stores.

Founding and Growth Through Acquisition

Ames was founded in 1958 when two brothers, Milton and Irving Gilman, opened a general store in an old mill in Southbridge, Massachusetts. The Gilmans took the name of their store from the name of its site's old tenant, the Ames Worsted Textile Company. In starting out their business, the Gilmans sought to fill a niche in the retail industry that had hitherto been ignored. They did so by opening a discount store in a rural area where there were no other large, competing stores around. When this formula proved profitable, the Ames company was incorporated in 1962.

Ames expanded steadily, concentrating its growth in the Northeast. In January 1972, 14 years after its founding, Ames made its first major acquisitions: the Joseph Leavitt Corporation and the K & R Warehouse Corporation. Six years later, the company continued its expansion through acquisition when it purchased the Davis Wholesale Company for $1 million, bringing 13 W.T. Grant general stores into the company fold. The purchase of Neisner Brothers, Inc. followed ten months later for $38 million. Neisner Brothers, which was in Chapter 11 bankruptcy and reorganization, operated 32 stores in New York and Florida. Their acquisition brought the number of stores Ames had acquired during the 1970s to 47; the company, however, soon closed ten stores in the New York area.

In each of its acquisitions, Ames bought a struggling company then worked to turn around its operations. In this endeavor, Ames proved largely successful. The company brought in merchandise made by well-known manufacturers and sold it in bright, well-organized settings. Prices were kept low all the time, rather than being set high and then reduced for periodic sales. For advertising, the company relied on direct-mail campaigns sent to carefully selected shoppers who lived near Ames stores. In some cases, this formula succeeded in raising sales by as much as 50 percent.

By 1981, Ames was operating 115 discount stores, in a chain that ran from Maine to Maryland. In addition, the company ran 20 variety stores, most of which were located in Florida. Five discount stores and one variety store had been opened in the last year. All of the company's retail properties were located in small towns or near highways that were easily reached by people living in the surrounding areas. Ames had stuck to its original rural orientation, eschewing heavily industrialized areas and places where one company employed almost all the inhabitants. About 55 percent of the company's sales came from hard goods, and the rest were in soft housewares and apparel.

In order to maintain its policy of offering brand names at discount prices, Ames maintained tight control over its overhead and interest payments. These policies enabled the company to establish an unbroken record of profitability since its inception, and eight straight years of growing sales and earnings. Ames ended 1981 with sales of $400 million, nearly one-half of which was accumulated in the last quarter of the year, when Christmas sales enhanced retailers' results.

The company relied on strengthened sales of hard goods such as housewares, automotive supplies, and hardware to power its growth and added departments featuring furniture, flowers and plants, cosmetics, toys, and sports equipment. The quality of Ames's women's clothing and accessories was upgraded, and the company also moved to bring its jewelry sales operations more firmly under its own control. To continue its upward path, Ames began a process of renovating its stores, in hopes of improving its sales per square foot of retail space. In March 1981, the company remodeled its original Massachusetts store, adding 20 percent more display space for higher quality goods and new products. These modifications resulted in a sales increase of 25 percent. After this success, the company embarked on a program to update its other properties, scheduling two more stores for overhauls in the next nine months, and eight others for renewal in 1982.

Ames returned to its policy of growth through acquisition in 1984 when it bought KDT Industries, Inc. for $28.5 million. Like past Ames purchases, this company was an organization in distress. Some of its properties had been sold to pay creditors, leaving 42 King's department stores and $98 million in tax credits. At the end of that year, Ames could look back on a promising pattern of growth, as sales rose more than 25 percent to $822 million, and earnings climbed 43 percent to $28.5 million.

Reassured by these positive results, the company made a riskier purchase the next year, paying $196.5 million in April 1985 for the G.C. Murphy Company, a discount department store chain based in Pennsylvania. With this move, the company doubled its sales, to $1.7 billion, and in one stroke became a powerhouse in retailing. This expansion came at a price, however, as Ames's debt grew temporarily to 80 percent of the company's worth. By purchasing Murphy, Ames moved its operations into 14 additional states.

Within three months of its purchase of Murphy, Ames closed or sold 130 of the chain's unprofitable stores in an effort to make its unwieldy purchase profitable. In addition, the company began the process of converting the Murphy stores to the Ames model, as it reconfigured operating systems, methods, and procedures. This process proved difficult and time-consuming, and it temporarily distracted the company's management from aggressive growth in its other stores. In the spring of 1986, an error occurred in which the inventories of clothing items intended for wear in the warmer months were shipped out to Ames stores late in the selling season, resulting in forced mark-downs on much of the merchandise, which depressed company earnings for that period.

Despite this setback Ames planned further expansion, plotting 12 percent growth for each year left in the decade. These ambitions were stymied in the following year, as Ames experienced unusually high "shrinkage"--retailing jargon for losses due to theft and embezzlement of goods, as well as poor inventory control and pricing mix-ups. Ames ended 1987 with $34.2 million in profits.

The Late 1980s Zayres Acquisition

Nine months later Ames agreed to make its largest and most ambitious purchase to date, pledging $800 million to acquire the discount stores division of the Zayre Corporation, based in Framingham, Massachusetts. With this move, Ames doubled its number of stores for the second time in three years to become the third largest U.S. discount store operator. The newly combined companies estimated sales of $5.39 billion in their 736 total stores. For its money, Ames got 392 stores located in the Northeast, the South, and the Great Lakes states. While Ames already operated in many of these areas, its stores were primarily located in rural areas, while Zayre's strength was in urban zones. Although the Zayre purchase enabled Ames to begin operating stores in such promising markets as Florida and Illinois, overall the move was risky. The Zayre properties were sold below their theoretical value as a result of their recent history of large losses. "I love to buy when its unfashionable and everything is in disarray," Ames's chairman told the Wall Street Journal at the time.

Because the Zayre name was so well known in the areas where it operated, Ames planned to keep the name for a certain period of time while it converted the stores to the more efficient Ames operating standards, which included a large number of refurbished store properties, lower prices and less reliance on sales to move merchandise, and a smaller selection of goods in some departments. Initially, the company also planned to retain all Zayre personnel, although, ultimately, it estimated that ten to 15 percent of Zayre's unprofitable stores would be closed.

In the first month of 1989, Ames began to implement these plans, closing 77 discount department stores, 74 of which were Zayre stores that had been racking up annual losses of $20 million. To further streamline itself and sharpen its focus on its largest and most recent purchase, Ames sold off its G.C. Murphy properties in August 1989 to E-II Holdings, owned by the Riklis family, for $77.6 million. In this way, Ames hoped to concentrate its efforts on discount retailing, shedding its variety store operations, which fit in less well with the company's overall profile than Ames executives had anticipated. In addition, the sale of the Murphy properties allowed the company to pay off some of the high interest debts incurred in the purchase of Zayre. After these reductions, Ames became the nation's fourth largest discount retailer, with 693 stores in 20 states running from the Northeast, out to Illinois, and then down to the South.

These moves helped Ames to incorporate its new properties more fully into the company. However, the decision on whether to change the name of the Zayre stores still had to be made. Zayre had its own history as one of the oldest and best-known U.S. retail chains. In deference to this heritage and to the brand loyalty of many of Zayre's urban customers, Ames announced in February 1989 that the company would not change the names of 61 profitable inner city Zayre stores. Eight months later, however, on October 26, 1989, it did reopen 254 old Zayre stores as refurbished Ames stores. Improvements included new paint, better lighting, and more attractive displays, as well as a computerized cash register system meant to speed up transactions and improve inventory control. The grand reopening was supported by a multimillion-dollar television advertising campaign featuring the slogan, "We grew up with better values." In addition, the company planned further renovations of these stores in the near future.

Among the most pressing tasks in consolidating Zayre and Ames operations was merging management staffs. The company closed Zayre's Massachusetts office and moved its employees to the Ames headquarters located outside Hartford, Connecticut. Zayre's management corps was cut in half, and the company's 23 regional offices were reduced to seven. This transition was made much more quickly than originally planned, in seven months rather than a year and a half. As a result of this speed, Ames expected to quadruple its savings from this paring down, to $40 million.

Losses in the Late 1980s

Despite this unexpected gain, Ames's profits remained low because sales for the spring quarter of 1989 proved disappointing. The company was forced to post a loss for the first half of the year. As the economy of the Northeast, where nearly half the company's stores were located, further slowed, Ames gradually saw its high hopes for its Zayre stores grow dimmer. Although sales in its old Ames stores rose, returns at its Zayre properties went into a slump, dropping off by 15 percent. By the end of the third quarter, continuing difficulties with Zayre caused a further loss of $7 million, bringing losses at Ames to nearly $28 million for the year.

Growing desperate, Ames opened its stores on Thanksgiving Day, in hopes of boosting sales. Nevertheless, it appeared that Zayre's traditional core of customers was eschewing the remade stores. Zayre shoppers were accustomed to stores open 24 hours a day, a policy that Ames had eliminated as a cost-cutting measure. In addition, Zayre had brought customers into stores with periodic deep discount sales, which were heavily promoted in newspapers and mailed circulars. Along with these items, racks and bins of marked-down items were found in the stores. Ames store policy, however, eliminated deep discounts in favor of steady, everyday low prices, to which it hoped customers would adjust. Although this kept profit margins higher, the company's prices proved uncompetitive in a discount department store bargain war. In addition, Ames switched Zayre's apparel merchandise from inexpensive but fashionable items to basic goods, alienating traditional Zayre customers. The company's elimination of the Zayre credit card and its lack of heavy advertising also cut into sales.

Despite the poor results from the Zayre stores, Ames executives were resolved to stick with their original plan of converting the stores to the traditional Ames model. "The philosophy is working," the chairman of the company told the Wall Street Journal, adding, "It has worked for half our business. It's going to work for the other half." This optimism, however, proved ill-founded, as company results continued to worsen. In early 1990 Ames closed an additional 15 of the older Zayre stores, most of which were located near other Ames outlets. When unexpectedly poor sales made it impossible to pay for past purchases, Ames found itself unable to buy needed merchandise from its suppliers. The company ended the year with losses of $228 million.

By late April 1990 Ames was staggering from continued poor sales at its Zayre operations, as well as the debt burden brought on by the large purchase and the costs of converting stores. Manufacturers were refusing to ship the company merchandise, and bankers were refusing to lend it any more money. Finally, on April 25, 1990, Ames was forced to file for bankruptcy, seeking protection from its creditors in Chapter 11 reorganization. Shortly after this, the company's chairman resigned. Stephen Pistner, a specialist in retail corporate turnarounds, replaced him and began the long process of digging Ames out of the hole created by its Zayre purchase. As a result of its bankruptcy filing, Ames suspended all advertising for four weeks, hoping to get the pipeline of merchandise moving again. In addition, the company was able to secure a $250 million loan from a New York bank that allowed it to make essential cash outlays, such as meeting its payroll and paying utility bills.

Among the first steps taken by Ames in this predicament was the closing of an additional 221 stores, a reduction of one-third of its store base. In doing so, the company let 18,000 employees go. Most of the stores, which together had lost nearly $50 million in the previous year, were located in the Midwest and South. Liquidating these properties allowed Ames to raise $210 million from its sold-off inventory. Despite this gain, the company, now being run by a new team of managers, reported a $538 million loss for operations over the first half of 1990. Additional cost-cutting measures were announced in 1991, as Ames continued to work on a plan to pay off its creditors under the watchful eye of the bankruptcy court. In October the company announced that it would close 77 more stores and lay off 4,500 more employees after the holiday season.

In 1992 Ames began to wrap up its negotiations with its creditors in an effort to finalize a plan for reorganization to present to the bankruptcy court. In January the company submitted a tentative plan for reorganization to the court. In March hearings were delayed because disputes over the nature of the company's final payments to creditors remained unresolved. In September, Ames submitted an amended reorganization plan to the court that included an additional set of store closings. In order to help raise $325 million in cash to pay its creditors, Ames elected to shutter 60 stores in 12 states, costing 3,500 workers their jobs.

In December 1992 continuing weak results and large operating losses caused Ames's board of directors to oust Pistner. The company had introduced a policy of offering deeply discounted items to bring customers into stores, with the expectation that, once in a store, people would also buy higher-priced items. Instead, however, the company found that shoppers were "cherry picking' bargains and then leaving, causing Ames to report losses of $91.4 million over its third quarter of 1992. As losses for November continued to mount, despite a relatively high sales volume, the company asked for another delay in the consideration of its reorganization plan. Following Pistner's ouster, Peter Thorner, who had been CFO and executive vice-president, was named president and CEO on an acting basis and began running the company in concert with an oversight committee consisting of three board members.

Emerging from Bankruptcy in 1992

Finally, on December 20, 1992, a bankruptcy judge approved Ames's plan to leave Chapter 11. Ten days later, the company consummated the plan and formally emerged from bankruptcy. The new Ames operated 309 stores in 14 states, a drastic reduction from its peak of 678 stores. To finance its operations, the company had arranged a $210 million letter of credit from its bankers. It planned to use this money to upgrade and replenish the merchandise of its remaining stores.

The key to a company turnaround was a refocus on Ames's traditional customers--people in the lower middle income sector. Also, instead of joining the private label trend, Ames emphasized brand name products. Customer service became a renewed area of focus, as managers worked to ensure that items remained in-stock and on the shelves. The company really began to turn the corner after a new management team was put in place. In 1993 Paul Buxbaum was named chairman, while Joseph Ettore was named president and CEO in June 1994 following the resignation of Thorner. Ettore had been president and CEO of Jamesway Corp., a Secaucus, New Jersey-based discount retailer. Ames returned to profitability in 1994, posting net income of $10.8 million on revenues of $2.12 billion. During 1994 Ames introduced the 55 Gold program, whereby shoppers over age 55 received a ten percent discount on all merchandise every Tuesday; this successful promotion helped to increase sales and store traffic, and aided in the creation of a second core customer--older shoppers. With Wal-Mart expanding rapidly in the Northeast, Ames also worked to modernize stores and their layouts through remodeling, with 52 stores receiving a makeover in 1994 alone.

Ames hit a bump on the road to recovery during the 1996 fiscal year, when weak holiday sales forced it to close 17 of its 307 stores, lay off more than 1,000 people, and take a $20 million charge, which led to a full year net loss of $1.6 million. The company returned to the black in 1997 and had an even stronger year in 1998 when it posted net income of $34.5 million on revenues of $2.23 billion. By this time Ames had recovered sufficiently to risk venturing back into the acquisition realm. In November 1998 the company agreed to acquire Hills Stores Company, a struggling 155-unit discount chain based in Canton, Massachusetts. The total cost of the acquisition, which was consummated in March 1999, was about $330 million. The addition of Hills beefed up the Ames presence in New York, Ohio, Pennsylvania, and West Virginia, and added the states of Illinois, Indiana, Kentucky, North Carolina, and Tennessee to its territory. Ames became the fourth largest discount chain in the United States, trailing Wal-Mart, Kmart, and Target.

During 1999 Ames remodeled and converted to the Ames format 150 of the Hills stores, spending about $185 million in the process. In April 1999 Ames gained additional units through the $40 million purchase from Caldor Corporation of seven stores in Connecticut and one in Massachusetts, as well as a state-of-the-art 649,000-square-foot distribution center in Westfield, Massachusetts. Caldor was a discount chain being liquidated under Chapter 11 bankruptcy protection. The Caldor stores were converted to the Ames format later in 1999.

Under the leadership of Ettore, who in late 1999 added the title of chairman to his responsibilities as president and CEO, it appeared that Ames had completed its turnaround. By targeting lower middle income and older customers with smaller-size stores (averaging 60,000 square feet versus the 100,000 of the competition), Ames appeared to have carved out a unique niche that allowed it to compete with the national discounters.

Ames Department Stores, Inc. History

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