Morse Shoe Inc. Business Information, Profile, and History

History of Morse Shoe Inc.

Morse Shoe Inc. is a leading seller of low-priced shoes, which it sells through its Fayva chain of shoe stores and through leased shoe sales operations that it runs in department stores. The company, which was founded by the Morse family in the 1920s, has enjoyed steady growth in the ensuing decades. It first sold stock to the public in the 1960s, was taken private in the late 1980s, and was finally purchased by its largest competitor in the early 1990s.

Morse got its start in 1922, when Lester Morse joined with two partners to open a store called Teddy's Shoe Store in Massachusetts. Shortly after the business was begun, Lester was joined by Alfred Morse, who worked for the company briefly before leaving to strike out on his own in 1925. In March 1927, Alfred returned to the shoe trade, opening a ladies' shoe store in Providence, Rhode Island.

In the late 1920s both Lester and Alfred Morse expanded their operations. Lester opened a chain of shoe stores under the name Morse Shoe Stores Corporation in Massachusetts. To the south, Alfred's group of retail outlets was known as Morse's, Inc. By the start of the 1930s, it had become clear that the Morses could reduce costs if they combined some operations. In 1933 the Morses opened a joint buying office.

Both Morse chains operated under the same principles. The stores sold only women's shoes and were run under similar concepts. The Morses were careful not to open stores in the same cities, and so avoided competition with each other. Eventually, the Morses expanded their line to include some children's shoes. Further cooperation in their activities came when the two established a joint warehouse, with goods for each chain's stores on separate floors.

In the 1940s a third Morse joined the family operation. William joined his older brother Alfred to start a wholesale shoe division. This joint venture sold shoes to department stores. Morse bought moderately priced shoes directly from manufacturers, then resold them to department stores at a profit. Such arrangements enabled the Morse brothers to take care of all of the stores' shoe needs. Sales receipts were sent to the brothers so that they could monitor department stores' stock.

In the early 1950s Morse implemented an electronic data processing system at its warehouse. Each pair of shoes was tagged with a two-part ticket. When a pair of shoes was sold, half of the ticket was removed. The information on the ticket stub was then tabulated at the company's main office, an arrangement that allowed the company to track stock by style, color, heel height, and price.

By 1955 the two Morse shoe operations comprised 45 stores. The company was incorporated in two states, with Lester's operation based in Massachusetts, and Alfred's registered in Rhode Island. In the mid-1950s, the Morses expanded their operations again as they explored the recently-established discount shoe retailing market. Unlike conventional shoe stores, where customers were waited on by salesmen whose salaries and commissions added to the price of the products, discount shoe operations were self-serve. Customers selected and fitted their own shoes, and paid a lower price for them as a result.

Morse opened two discount shoe departments within larger department stores. The first department store to lease such an operation was Arlan's, located in Fall River, Massachusetts. The second Morse discount shoe lessor was placed within the new King's department store, located in Lowell, Massachusetts. Following the success of these two tests, Morse moved aggressively into the discount shoe market. The company leased space within department stores, paying the host store a percentage of sales from the area. Because Morse's discount operations produced a high volume of sales, the company typically was able to pay host department stores a smaller percentage of sales than its competitors.

In the late 1950s Alfred and Lester Morse merged their operations, with each taking half of the stock in the joint corporation. The company was incorporated as Morse Shoe, Inc., in 1961 in preparation for an offering of stock to the public. The Morses structured their company so that each leased shoe department was a separate corporation under the umbrella of the parent company.

In April 1962 the Morses used the over-the-counter market to sell shares in their company for the first time. More than two years later, in November 1964, the company moved to the New York Stock Exchange.

In the mid-1960s Morse split its operations into two separate lines of goods in an effort to avoid the problem of competing with itself in different department stores. As part of its effort to keep the operations separated, the company set up two separate inventories in its warehouse and coded its shoes with different color tickets. Morse eventually established three separate lines of shoes to offer retailers.

In 1968 Morse entered the shoe manufacturing business for the first time. The company bought the Porter Shoe Manufacturing Company, based in Milford, Massachusetts, and the Jonell Shoe Manufacturing Corporation. The following year, Morse bought the Lowell Shoe Company and the Puerto Rico-based Isabela Shoe Corporation. Morse also expanded its operations to Canada. By the end of the 1960s, the company ran 33 discount shoe departments in large stores in Canada. By 1969 Morse operated more than 650 shoe sales outlets that generated sales of more than $160 million.

But while Morse's discount department store operations continued to thrive throughout the 1960s, the company's freestanding retail outlets, located in 47 cities and towns throughout southern New England, began to suffer a decline in sales. In small towns, the company's stores, which typically logged $100,00 to $125,000 in annual sales, found themselves competing for customers with growing numbers of shopping malls, discount department stores, and large national retailers such as Sears, Roebuck & Company. As roads improved in rural areas, people became willing to drive further in order to shop and spend their money. Over time, sales at many of Morse's freestanding stores shrank while wages and costs increased. The operations ceased to be profitable.

When Morse's leases on stores in smaller urban centers expired, the company closed these stores. By the end of the decade, the company had reduced the number of retail outlets it ran to 25, all of which were located in larger cities. The stores that were spared provided a higher volume of sales and profits.

To supply its Canadian operation, Morse opened a warehouse in Montreal. Morse's American operations were served by a 467,000-square-foot warehouse in Canton, Massachusetts. The company filled this facility with shoes made at its own factories in New England and Puerto Rico and shoes purchased from more than 100 other suppliers. Among these sources were Italian manufacturers, who made casual shoes, dress shoes, and other styles for men, and Japanese sources, who manufactured rubber shoes and tennis shoes. In addition, shoes were imported from England, France, Belgium, Holland, Spain, India, and Mexico. Forty percent of the company's products were shipped to North America from overseas.

All of the shoes from Morse's various sources were branded with the company's own trade names, which included "Jewel Tones," "Pretties," "Carousels," and "Jumping Jacks" for children, and a number of different labels for men. These shoes were distributed through 56 different sales regions.

At the start of the 1970s, Morse moved back into the freestanding retail store segment of its market with renewed energy. The company purchased the Fayva chain of self-service shoe stores, which had outlets in three states. Morse also added to its manufacturing capacity with the 1972 purchase of the Jo-Gal Shoe Company, Inc., based in Lawrence, Massachusetts.

Throughout the 1970s, Morse worked to rapidly expand the number of stores in its Fayva chain. Starting in 1978, the Fayva franchise was expanded by more than 100 stores a year. By 1980 Fayva's operations had grown to include 662 stores in 27 states.

In 1981 Morse opened an additional 106 Fayva stores, bringing its total to 768. Expansion of the Fayva concept, slated to take place at the rate of 125 stores per year, constituted Morse's main thrust for growth in the 1980s. The company planned to expand in markets where Fayva was already established. Southern California, Texas, Florida, and big cities east of the Mississippi were thus targeted. Morse hoped that this strategy would enable it to maximize the effectiveness of its advertising dollar.

The company maintained three other freestanding retail outlets in addition to Fayva: 43 Morse full service family shoes stores, located in 22 states; 59 Upstage women's fashion shoe boutiques, spread across 27 states; and six Jack and Jill stores, which sold children's footwear. In addition to its chains of stores, Morse also operated 453 footwear departments in various discount stores across the United States. Overall, Morse boasted 1,329 retail units in 35 states and 10 Canadian provinces.

Morse also maintained two distribution arms that sold shoes to other retailers through the company's factory sales force. The company's Meridian Footwear operation designed, developed, imported, and distributed men's, women's, and children's shoes. Meridian marketed "Disney Pals" children's shoes, athletic shoes, and fashion footwear that was resold in shoe and department stores across the United States, Canada, and Europe. The company's other distribution arm, the Super Shoe division, merchandised shoes to discount stores, drug stores, general retailers, and food stores. Finally, Morse maintained a Lowell Shoe, Inc., subsidiary. Lowell Shoe sold women's work shoes and white shoes for medical personnel.

These combined operations made Morse one of the country's ten largest footwear retailers. In 1981 the company registered sales of $447 million, an increase of $10 million over the previous years' sales. Company management was concerned, however, that earnings for 1981 had been fairly flat. Morse thus scaled back its ambitious plans to roll out the Fayva chain in 1982. The company targeted just 80 new store openings per year instead of its previously planned 125.

In 1982 Morse's earnings continued to be depressed by an overall recession in the economy. In addition, the company's rapid addition of new shoe stores had given it a number of unprofitable locations. By the early 1980s it was clear that Morse had grown stagnant, and that a change in the company's top management was needed. Morse's chairman, who had been with the company for 32 years, was 70 years old and had fallen ill. The company's president had also been with Morse for over three decades.

In July 1982 both of these men resigned. They were replaced by Manuel Rosenberg, an outsider who had been an executive for an upscale department store. Rosenberg moved immediately to review Morse's operations and return them to profitability. In November 1982 Morse announced that it would close 165 unprofitable shoe stores. "These stores have represented significant erosion of our profitability. With a healthier base of stores, we plan to expand the Fayva chain," Rosenberg told the Wall Street Journal. Because of write-offs associated with the store closings, Fayva reported a loss for 1982.

In addition to closing unprofitable stores, Rosenberg put in place a general restructuring of Morse's operations. He split off the company's various units into separate divisions and profit centers. Expenses were reduced through a freeze on hiring and salary increases, a cut in headquarters staff, and the elimination of three-quarters of the company's stock dividend. Many of Rosenberg's moves were indicative of an effort to implement better controls over Morse's operations and relieve some of the strain that had accumulated during Morse's period of rapid expansion.

Morse also made a number of changes at its stores in an effort to increase sales. In its Fayva outlets, Morse began to offer more fashionable shoes. The company increased the level of stock available at each location and lowered prices, bringing them back into better alignment with the quality of its shoes. In addition, Morse made deep cuts in the prices of its outmoded stock to clear it out of its stores. The company also began to offer special promotions on popular styles.

By the start of 1983, these efforts had begun to take effect. In the first six months of the year, Morse reported a 19 percent increase in sales, to $249 million in revenues. In the third quarter of the year, sales rose an additional 22 percent. Overall, Morse reported 1983 earnings of $19.1 million.

Morse continued its efforts to strengthen its profitability through the mid-1980s. In January 1984 the company closed its Jo-Gal women's shoe factory in Lawrence, Massachusetts; nine months later it sold its Milford Shoe Division. Although Morse signed agreements to run shoe departments in ShopKo Stores and G.C. Murphy Stores during that year, it lost the right to run such operations in Wal-Mart stores in October 1984.

By the end of 1985, Morse's sales had risen to $541 million, generating earnings of $7.2 million. The company attracted the attention of corporate raiders. A single investor, Asher B. Edelman, acquired 5.9 percent of its stock at the end of 1986. By the middle of 1987, a group led by Edelman had acquired 8.8 percent of Morse's shares. At that time, this group made a bid to purchase the entire company. Morse's management responded by forming a competing group to acquire the company in a leveraged buy-out. By July 1987 this transaction had been completed for $263 million.

In the late 1980s and early 1990s Morse saw its primary group of stores--Fayva&mdash-counter stiff competition from the Payless Shoe Source chain, owned by the May Department Stores. Fayva's market share gradually eroded, and the company was unable to increase sales and make improvements in its stores.

In January 1993 Morse was sold to J. Baker, Inc., its biggest competitor in the licensed shoe department business, for $58 million. In the wake of its acquisition, Morse's new owners embarked on a campaign to return the company's operations to profitability. Baker moved to close Fayva's unprofitable locations and to update its other outlets. By 1994 the chain's number of locations had shrunk to 360, which generated sales of $173 million. "We took the markdowns we had to take and we've spent money remodeling or renovating more than half the units and rolling out new product packaging and displays," Baker's president told Stores.

With these steps, Baker hoped to convert Fayva's many browsers to buyers, and to win some market share back from Payless. The Payless chain, however, announced plans for a major expansion into the Northeast, the part of the country where most of Fayva's stores are located. To combat its prime competitor, Fayva planned to customize the product offerings of each store after examining the needs of its location and the demographic profile of its customers. Baker hopes that such moves will rejuvenate its Morse operations and return the company to the state of financial health that it had enjoyed throughout most of its history.