Musicland Stores Corporation Business Information, Profile, and History

Company Perspectives:

As the leader in the entertainment retailing industry, we are embracing new tech-savvy strategies which will enhance and integrate our online and in-store presence to increase customer loyalty, customer retention and, thus, revenue. Our annual cash flow, upwards of $100 million, enables us to implement new strategic plans to build sales, and improve service in our stores and online. Our consumer-centric vision will provide customers with access to products when and how they want it. Our plans are geared to benefit consumers and investors.

History of Musicland Stores Corporation

The leading specialty retailer in the United States of prerecorded music, movies, and audio and video accessories, Musicland Stores Corporation operates more than 1,300 stores in 49 states, Puerto Rico, and the United Kingdom. These include approximately 650 Sam Goody stores (selling prerecorded home entertainment products, primarily in suburban shopping malls); 400 Suncoast Motion Picture Company stores (selling video, DVD, and movie-related products, primarily in metropolitan shopping malls); around 75 Media Play superstores (selling books, music, videos, software, and other products in select large-to-mid-size markets); and some 200 On Cue stores (selling a variety of entertainment products in small town markets). Each of these stores also has a sister e-commerce site, offering another sales channel to the company's customers. As 2001 began, Musicland was in the process of being acquired by Best Buy Co., Inc., a leading operator of consumer electronics superstores.

Early Years, Featuring Many Owners

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 15 stores by 1964, at which time Evenson and Sayre decided to sell their interest.

His entrepreneurial streak still alive, Evenson founded a sizeable chain of greeting card stores, which he ultimately sold to Hallmark. Sayre, on the other hand, remained with Musicland until 1981. From 1964 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. In 1977 Musicland was incorporated as the Musicland Group, Inc.

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.

1980s: Eugster's Turnaround, an IPO, Then an LBO

From 1979 to 1983, Ted Deikel (best known for his leadership of Minnesota-based mail-order firm Fingerhut) managed Musicland and Primerica's other retailing concerns. Deikel's foremost task was to restructure Pickwick and return it to profitability. It was to Jack W. 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, was '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 nonretail 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 Musicland'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 before being renamed Suncoast Motion Picture Company, Musicland's movie division saw sales grow to nearly seven 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 newly public firm dubbed the Musicland Group, Inc. The IPO was particularly well received due to Musicland's dominant market position and a new upsurge in record-buying among the 30- and 40-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 (including the Donaldson, Lufkin & Jenrette investment group) to pursue a daring highly leveraged buyout (LBO) in August 1988. When the ink was dry on the $410 million deal, 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. As part of the transaction, a new entity called Musicland Stores Corporation was incorporated, which acquired the Musicland Group, Inc. Following the LBO, Musicland continued its program of aggressive expansion, solidly outdistancing such competitors as Trans World Music, Wherehouse Entertainment, and Tower Records.

1990s: Recovering from a Near-Death Experience

In July 1990 the company entertained plans of going public, believing it could raise as much as $96 million in interest-free capital. With the Iraqi invasion of Kuwait in August and the subsequent downturn in the stock market, however, 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 Minneapolis 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.' Such speculation was quelled in February 1992, however, when Musicland extricated itself from LBO financing pressures by taking the company public in an enormously successful offering. A follow-up Minneapolis 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.'

Following the offering, Musicland topped the $1 billion mark in sales in 1992 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 Borders Group, the store was 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 café in the center of the store.' Musicland expanded its portfolio of store formats further through the 1992 launch of On Cue, with the first unit opening in Fairmont, Minnesota. The On Cue format was similar to Media Play's in its range of products, though not in the selection nor in the store size, and was designed as a freestanding outlet for smaller markets, with populations of 25,000 to 40,000.

The early returns on Media Play were astoundingly good, with the original store achieving sales of $10 million in its first full year. Musicland then launched an aggressive program of expansion, opening 89 Media Play stores and 153 On Cue stores from 1992 through 1995. Meanwhile, the company's mall stores, which were not faring as well as the nonmall units, began to be reorganized. In 1995, the Musicland stores began to be converted to Sam Goody outlets. Among the rationales for this move was the ability to promote and manage one store identity rather than two as well as the feeling that the Musicland name was limited in that it implied that only music was sold there. The conversion was completed by 1997.

In November 1995 Musicland announced plans to sell a 30 percent stake in Suncoast in order to pay down debt and fund expansion of Media Play and On Cue, but the plan was scuttled in early 1996 because of a lack of enthusiasm from Wall Street. The company needed cash because its growth strategy had faltered and its stock price had fallen precipitously. At the same time that the music industry was going through a sales slump, music retailers were facing brutal competition from both consumer electronics category killers Best Buy and Circuit City and big discount merchandisers, including Target, Kmart, and Wal-Mart. All of these chains were aggressively expanding their sales of music and videos by drastically cutting prices, in some cases below cost. Media Play was supposed to represent Musicland's own category killer but because of these competitors, who were in a better financial and operational position to maintain the low prices, Media Play was unable to gain an edge by undercutting them. With sales at the mall stores also suffering from the new competition, Musicland's overall sales were failing to increase at the pace needed to maintain previous profit levels. The company began closing underperforming stores, taking charges for this purpose and for the writing down of goodwill associated with the 1988 LBO. The company's poor performance, coupled with the charges, led to net losses of $135.8 million in 1995 and $193.7 million in 1996.

For most of 1996 and 1997, Musicland teetered on the verge of bankruptcy, a fate that befell a number of other music retailers during this period. The company closed more than 100 stores, including 19 Media Play outlets, and scaled back its expansion plans. It also shut down its St. Louis Park distribution center, with operations there shifted to a huge new facility that had opened in Franklin, Indiana, in March 1995. Needing a strong 1997 Christmas selling season to cement its recovery, Musicland delivered in part by placing emphasis on the new DVD format, selling $1 million worth of DVDs during the week of December 14--20 alone. Sales of DVDs for all of 1997 were $50 million. Also helping was a resurgence in sales of music video, fueled primarily by the popular group Hanson. Consequently, Musicland returned to the black in 1997, posting net income of $14 million on sales of $1.77 billion. Results for the following year were even better: $38 million in profits on revenues of $1.85 billion.

A cautious return to expansion came in 1999, when 39 stores were added, most of them either Media Play or On Cue outlets, with On Cue becoming the fastest growing format. That year, the company also ventured into e-commerce for the first time, launching sites for each of its four main brands: Media Play, On Cue, Sam Goody, and Suncoast. The sites were launched through an advertising campaign dubbed 'We Got Dot.' For 1999, Musicland reported record sales of $1.89 billion and record profits of $58.4 million.

Online revenues during the first quarter of 2000 had already reached $1.9 million, although the e-commerce initiative was thus far a money-losing one. In October 2000, Musicland purchased a 20 percent stake in an 18-store retail chain called Golf Galaxy, which was privately owned and based in Minneapolis. This venture into sporting goods seemed somewhat odd, although the company had once owned the Dunhams sporting goods chain before selling it following the 1992 IPO. Throughout 2000, Musicland was dogged by a lagging stock price, in spite of its seeming recovery from the dark days of the mid-1990s. One reason for the lack of investor enthusiasm was the uncertain future of the music industry, specifically in light of the rampant downloading of music over the Internet that had been made popular by Napster and other online music services. Nevertheless, Musicland was itself preparing its web sites to deliver downloaded music if the demand arose and if it became feasible to do so at a profit.

Meanwhile, by late 2000, the company was still saddled with $260 million in long-term debt and needed another year of strong earnings to retire the bulk of it. A different avenue for expunging the debt arose, however, in the form of a company takeover. In early December 2000 Musicland agreed to be acquired by crosstown rival Best Buy Co. for $425 million in cash and the assumption of the company's debt. Best Buy planned to retool some of Musicland's store formats and was particularly interested in gaining a presence within shopping malls by revamping the Sam Goody format through the addition of such consumer electronics goods as MP3 players, cellular products, and gaming items. Having conquered the nation's major markets, Best Buy also coveted the access to the smaller markets that would be gained through ownership of the On Cue chain. For Musicland, becoming part of Best Buy would give it access to more capital and could spark an acceleration in its growth.

Principal Subsidiaries: The Musicland Group, Inc.; Media Play, Inc.; MG Financial Services, Inc.; MLG Internet, Inc.; Musicland Retail, Inc.; On Cue, Inc.; Request Media, Inc.; Suncoast Group, Inc.; Suncoast Motion Picture Company, Inc.; Suncoast Retail, Inc.; TMG Caribbean, Inc.; TMG-Virgin Islands, Inc.

Principal Competitors: Amazon.com, Inc.; Barnes & Noble, Inc.; Best Buy Co., Inc.; Books-A-Million, Inc.; Borders Group, Inc.; BUY.COM INC.; Circuit City Group; Columbia House Company; Hastings Entertainment, Inc.; Kmart Corporation; MTS, Incorporated; Target Corporation; Trans World Entertainment Corporation; Wal-Mart Stores, Inc.; Wherehouse Entertainment, Inc.

Chronology

• Key Dates:

• 1956: Terry Evenson and Grover Sayre open the first Musicland store near downtown Minneapolis.
• 1964: The now 15-store chain is sold to Amos and Dan Heilicher.
• 1968: Having grown to 48 stores, Musicland is merged with Pickwick International.
• 1977: American Can acquires Pickwick; Musicland, with 230 stores, is incorporated as the Musicland Group, Inc.
• 1978: American Can acquires the Sam Goody chain, which is later made part of Musicland.
• 1980: Jack W. Eugster is hired to head up Musicland.
• 1986: Musicland launches a video-for-sale chain, Paramount Pictures, which is later renamed Suncoast Motion Picture Company.
• 1987: American Can changes its name to Primerica and sells 19 percent of Musicland to the public through an IPO.
• 1988: Musicland is taken private, as Musicland Stores Corporation, through a $410 million highly leveraged buyout.
• 1992: Musicland goes public again through another IPO; the Media Play and On Cue formats debut; sales top the $1 billion mark.
• 1995: Company begins converting Musicland stores to Sam Goody outlets.
• 1999: E-commerce sites are launched, one each for the four store formats.
• 2000: Musicland agrees to be acquired by Best Buy Co. for $685 million.