Stage Stores, Inc. Business Information, Profile, and History

Company Perspectives

Our corporate mission is simple--to provide our customers with the best selection of brands and styles in basic and updated merchandise, to offer consistent, exceptional, personalized service, as well as outstanding value in convenient, easy-to-shop locations.

History of Stage Stores, Inc.

Houston-based Stage Stores, Inc., was founded in 1988 as a private company and went public in 1996. The company is an apparel-retail chain operating more than 627 stores in small and mid-sized towns and communities in 31 states in the United States. The retail chain operates primarily under the Stage, Bealls, Palais Royal, and Peebles trade names to offer nationally recognized, moderately priced brand-name apparel, accessories, fragrances, cosmetics, and footwear for the entire family. Stage's stores have approximately 18,800 square feet of selling space and are mostly found in strip malls. Women's and juniors' clothing accounted for 39 percent of company sales in 2005; men's and young men's, 19 percent; children's, 12 percent; footwear, 12 percent; and accessories, cosmetics, and home décor, 18 percent. The company successfully emerged from bankruptcy in 2001 and is focused on growth in small to mid-sized markets.

Beginnings of a New Retail Concept: 1988-92

Stage Stores' operating history dates back to late 1988 when, through a leveraged buyout, the former management team of Palais Royal, Inc., Bain Capital Funds, and Acadia Entities formed a separate company--named Specialty Retailers, Inc. (SRI)--to acquire Palais Royal, a retail chain of 28 stores. Concurrently, SRI acquired Bealls Brothers, Inc., which operated 126 stores. Both Palais Royal and Bealls were family-owned, Houston-based apparel retailers that since the 1920s had built strong regional franchises in the central and southwestern United States. Palais Royal focused mainly on the operation of large stores in metropolitan markets while Bealls' business consisted primarily of smaller stores in rural markets. SRI's management team focused on integrating Palais Royal and Bealls and refined the retail concept that would differentiate the company from both department stores and specialty stores: SRI stores offered more convenience and customer service than were usually found in department stores, provided leading brand names of apparel, and made available a broader assortment of merchandise than could be found in specialty stores.

Palais Royal had relied on automation to improve operating efficiency, as evidenced by its early implementation of an automated personnel scheduling system, electronic point-of-sale cash registers, and a credit-application and behavioral-scoring system. SRI recognized the advances Palais Royal had made in automation and developed a retail concept that relied on efficient operating systems, advanced technology, centralized decision making, and tight control of operating expenses. In about 18 months SRI substantially completed the consolidation of Bealls' general and administrative functions into those of Palais Royal. Within three years, underperforming Bealls stores had been closed and the financial performance of the remaining Bealls stores had significantly improved. Expenses of acquisition and consolidation notwithstanding, SRI's net sales increased at a 3.5 percent compound annual rate to $447.14 million in 1991, from $403.9 million in 1988.

According to Kenneth R. Pybus' story in the Houston Business Journal, in 1992 SRI wanted to go public and "sought to raise $192 million in a dual debt and equity offering, but pulled back when the response was less enthusiastic than expected." Jim Marcum, vice-chairman and chief financial officer for Stage Stores, later commented that the filing was made "in anticipation of future growth. Because the future growth really hadn't been executed yet, they just felt you couldn't get the best valuation for the company," so they withdrew the filing. Undaunted, SRI focused on growth through additional acquisitions and consolidations of complementary apparel retailers, improved sales performance of acquired stores, and opened new stores, especially in small rural markets. In June 1992 the company acquired Colorado-based Fashion Bar, Inc., a family-owned business having 71 stores of which approximately 75 percent were comparable to Palais Royal and Bealls stores while the remainder were small specialty stores. Including Fashion Bar, as of June 26, 1992, SRI operated 230 stores--in Texas (141 stores), Colorado (66 stores), Oklahoma (nine stores), New Mexico (six stores), Alabama (three stores), California (three stores), and Wyoming (two stores).

When SRI reviewed its operations for the 1988-92 period, it could pinpoint the special features that distinguished Palais Royal and Bealls from other apparel retailers: namely, store size, layout, and location; merchandising strategy; customer service; operating systems and technology; and growth strategy.

The format and locations of the Palais Royal and Bealls stores offered a convenient and efficient shopping experience to customers. These stores, smaller than typical department stores yet larger than most specialty stores, accommodated apparel and accessories for an entire family. The stores were small enough for strategic locations in rural markets--where the company faced limited competition--or in convenient locations in outlying metropolitan areas. The company used a multimedia advertising approach to position its stores as the local destination for fashionable, brand-name merchandise. In the early 1990s consumers in small markets usually had been able to shop for branded merchandise only in distant regional malls. Consequently, SRI's merchandising strategy focused on the traditionally higher-margin merchandise categories of family apparel and accessories.

The company emphasized excellent customer service and promoted its private-label, credit-card program, which in 1991 included more than one million active accounts and contributed approximately 60 percent of net sales. Early in its history, Palais Royal had applied highly automated, integrated systems to reduce operating costs in labor-intensive areas, such as merchandising, credit, personnel management, accounting, and distribution. These proprietary systems increased sales per square foot, reduced markdowns, lowered overhead, increased efficiency, and allowed store personnel to focus on customer service and selling. Furthermore, automation allowed buyers to select and allocate merchandise according to the local demographics and sales trends of the various stores.

The company's successful experience in choosing complementary acquisitions and the timely consolidation of Bealls brought out several facts. First, many family-operated apparel retailers had healthy customer franchises but were underperforming due to lack of advanced systems and buying economies; second, gaining market share through acquisitions was generally more economical and offered greater opportunity for rapid growth than opening new stores.

Extending the Small-Market Franchise: 1993-96

In order to eliminate the possibility of having Specialty Retailers, Inc., be identified as only a specialty retail chain, in 1993 SRI's board of directors formed Apparel Retailers, Inc. (ARI), which concurrently became the parent company of SRI. Management recognized the potential of a unique franchise in small markets and committed the company to several initiatives for bringing about the full realization of this potential. These initiatives included: recruitment of a new senior management team; expansion in new markets through store openings and strategic acquisitions; emphasis on customer service and aggressive promotion of ARI's proprietary card; continuing refinement of ARI's concept; and closure of unprofitable stores.

On July 1, 1993, Carl Tooker--who had 25 years of administrative experience in the retail industry--was chosen as ARI president to lead the company's growth; a year later he became chairman and chief executive officer. Tooker succeeded 70-year-old founding President Bernard Fuchs, who retired after having been in the retail industry since 1944.

During 1994, ARI approved The Store Closure Plan that provided for the closure of the 40 underperforming Fashion Bar stores that were part of a 1992 acquisition and did not seem good candidates for consolidation into ARI's evolving small-market strategy. The ARI board believed that the merchandising strategy and market positions of these stores--located in major regional malls within the Denver area--were not compatible with its overall strategy. Then in late 1994 ARI initiated the series of acquisitions that became the backbone of its expansion into the small-market niche. The company purchased the 45 stores of Beall-Ladymon, Inc., and reopened the stores in the first quarter of 1995 under the Stage name. Where did that name come from? Fashion Bar had operated a small group of stores known as Stage Stores, which already had become part of ARI's operation. In 1996 ARI completed the closure of the other Fashion Bar Stores but kept the Stage name.

The results of the Beall-Ladymon acquisition confirmed the value of ARI's strategy for growth. The acquired stores posted an annual sales increase of 78 percent and a store-contribution margin more than twice that of the previous year. The company also opened 23 new stores. Total ARI sales increased 17.4 percent to $682.62 million in 1995, compared with $581.46 million in 1994. This increase was due in part to increased sales from 23 stores opened during 1994 and 1995. The increase, however, was partially offset by the effects of the Store Closure Plan and the 1995 devaluation of the Mexican peso, which negatively impacted sales at the six Bealls stores located on the Texas/Mexico border.

In keeping with its strategy of controlled geographic growth, ARI completed its second major entry into small markets with the June 1996 purchase of Uhlmans Inc., a privately held retailer with 34 locations in Ohio, Indiana, and Michigan--states where the company previously had no stores. These stores were similar in size and content to ARI's existing stores and were compatible with the company's retail concept. The company opened 35 new stores in the central United States and reported record sales of $776.55 million for 1996.

On October 25, 1996, more than four years after filing--and then withdrawing--an initial public offering (IPO) with the U.S. Securities and Exchange Commission, Apparel Retailers, Inc., changed its name to Stage Stores, Inc., completed another IPO by selling 11 million shares of common stock at $16.50 per share, and began to trade on the NASDAQ. In conjunction with its stepped-up expansion strategy, Stage Stores applied its small-market retail concept to micromarkets in communities with populations of from 4,000 to 12,000. The company capitalized on its favorable operating experience in scaling its store concept to an appropriate size of less than 12,000 square feet to operate in these small markets that generally had lower levels of competition as well as low labor and occupancy costs.

According to industry analysts David M. Mann and Ethan J. Meyers's December 1997 report on Stage Stores and the retail industry, during the last two decades, many small towns were experiencing "a resurgence as computer and communications technologies allowed professionals to live/work in small towns and improve their quality of life." Furthermore--due to the proliferation of electronic, computer, and print media--customers in small markets were generally as aware of current fashion trends and were as sophisticated as consumers in larger urban centers. National retailers, such as J.C. Penney and Sears, Roebuck & Co., had abandoned small towns in favor of locations in cities and large suburban malls; the majority of independent apparel retailers had been put out of business by the national discount retailers that still operated in small towns, but these discounters did not carry the depth of family-oriented, fashionable brand-name merchandise offered by Stage.

Mann and Meyers's analysis of the regional family apparel sector found that there were 22 companies operating more than 850 stores generating $2.3 billion. Within the relatively short span of less than ten years, Stage had recognized the latent opportunities in this market, noted the emergence of new lifestyles (for example, career women did not spend as much time shopping for the family as did the women of earlier decades), and developed a retail strategy based on convenient locations where all the family members of small communities could find nationally advertised, branded apparel.

Growth in the Late 1990s

With the June 1997 purchase of C.R. Anthony Company (Anthony's), Stage Stores strengthened its position as the dominant branded-apparel retailer in small-town America. Anthony's consisted of 246 family-apparel stores located in small markets in 16 states; the largest concentration of stores was in Texas, Oklahoma, Kansas, and New Mexico. Approximately 87 percent of Anthony's stores were located in small markets and communities having populations generally below 30,000. During the 1997 calendar year, Stage converted 130 of the acquired locations to its format, primarily under the Stage and Bealls trade names; the other remaining 105 stores were converted and included in Stage's operation by the summer of 1998. The 11 Anthony's stores that were located in overlapping markets were closed.

Acquisition of the Anthony's stores gave Stage the opportunity to accelerate its expansion program in existing markets and to extend its presence in new markets. Both companies benefited from synergizing their administrative infrastructures, leading, for example, to cost savings on overhead and enhanced opportunities for increased revenue and gross margins. Sales for 1997 increased 38.2 percent to $1.07 billion from $776.55 million in 1996.

As mentioned previously, Stage Stores operated under three different store nameplates: Palais Royal, Bealls, and Stage. Both the Stage and the Bealls nameplates identified the company's small-market stores. The company kept the two nameplates because Bealls was so well known in its home states. The Palais Royal nameplate identified the company's larger-market stores located in suburban neighborhoods and high-traffic strip centers, mainly in the Houston and Galveston areas. Although these large stores generated a significant amount of cash, which the company applied mainly to continue expanding into small-market stores, their profit margins were lower than those of the smaller stores. Stage continued to focus its growth primarily on small markets and did not plan significant expansion of the Palais Royal stores.

On March 25, 1998, Stage Stores announced that the Office of the Comptroller of the Currency had granted the company preliminary approval of an application for a credit-card bank charter. Pending further approval by the FDIC and the completion of all remaining conditions, Chief Financial Officer James Marcum stated that the company felt "confident that we will begin to see the economic benefits of the bank by the end of the third quarter." At this period in its history, the company had more than two million active credit accounts and proprietary credit-card purchases accounted for approximately 51 percent of the company's sales. Final approval of the bank charter allowed Stage to maximize fees and rates, the majority of which were subject to limits set by each state.

In April 1998 Stage began trading on the New York Stock Exchange. Sales for the first quarter of fiscal 1998 (ending May 2) peaked at a record $272.2 million, a 42.1 percent increase from 1997 first quarter sales of $191.5 million. Shares of stock rose to the $44-$52 price range, compared with the $16.50 price per share when the company went public in October 1996.

During fiscal 1997 the company's store count almost doubled, going from 315 stores in 19 states to 606 stores in 24 states as of January 1998. Furthermore, Stage clearly demonstrated that it had the ability and wherewithal to successfully open and convert a significant number of stores. As the 21st century drew near, Stage Stores continued to implement its aggressive small-market growth strategy through organic store openings, strategic acquisitions, and efficient consolidations. In June 1998 the company gained a foothold in the Pacific Northwest through the acquisition of 15 Tri-North Department Stores in Montana, Nevada, Oregon, and Washington. Upon completion of the acquisition, Stage completely remodeled and re-merchandized the stores; they were opened under the Stage name and format in the early fall of 1998. For the near future, Stage identified six viable acquisitions of privately held companies having a total store count of 425. The company's total vision, however, encompassed 1,200 potential U.S. markets that met its criteria for remaining the store of choice for well known, national brand-name family apparel throughout America's small towns and communities.

Overcoming Bankruptcy in the New Millennium

Stage's success during the 1990s came to a screeching halt in 1999 when the company reported a loss of more than $129 million due in part to a slowdown in store sales. Chairman, President, and CEO Tooker left the company early that year, leaving former C.R. Anthony executive Jack Wiesner temporarily at the helm. James Scarborough was named president and CEO in 2000. By this time, the company was in financial turmoil, struggling under a burgeoning debtload of $600 million related to its aggressive acquisition and expansion program. Unable to pay some of its vendors, Stage was forced to file for Chapter 11 bankruptcy protection in June 2000.

Stage emerged from bankruptcy in August 2001, owned mostly by its creditors. As part of its restructuring plan, the company shuttered 249 unprofitable stores, developed new merchandising strategies, and made sure to keep inventory at acceptable levels. The reorganization appeared to pay off and Scarborough's optimism was evident as he claimed in an August 2001 Journal Record article, "We've gone from a train wreck a year ago to one of the most profitable retailers in the country."

Indeed, Stage had secured six quarters of sales growth by 2002. Buoyed by its recent success, the company decided it was time to once again expand its arsenal of stores. Its plans for the year included opening 13 new stores, remodeling 14 stores, relocating four stores, and increasing the size of five stores. In 2003, the company acquired Peebles Inc., a chain with 136 stores in the Mid-Atlantic, southeastern, and midwestern regions. Upon completion of the deal, Stage operated in 27 states with revenues topping out at $1.2 billion. By mid-2004, the company's store count had climbed to 518 locations.

Stage posted record sales of $1.34 billion in 2005, climbing 8.1 percent over the previous year's figures. The company opened 36 new stores during the year but was forced to close four locations due to damage from Hurricanes Katrina and Rita.

In keeping with Stage's strategy to increase its store count in small profitable markets, the company decided to add B.C. Moore & Sons Inc. to its portfolio in February 2006. The 78-store chain had a presence in Georgia, North and South Carolina, and Alabama. A total of 69 of these stores would be converted to the Peebles name. In addition, the company planned to open 39 new stores during 2006.

In March of that year, the company began trading on the New York Stock Exchange. Company management was confident that Stage's problems related to its bankruptcy filing in 2000 were a thing of the past. With a strong focus on its customers in small and mid-sized towns, Stage and its Bealls, Palais Royal, Peebles, and namesake stores appeared to be on track for success in the years to come.

Principal Subsidiaries

Specialty Retailers, Inc.; Specialty Retailers (TX) L.P.; SRI General Partner L.L.C.; SRI Limited Partner L.L.C.

Principal Competitors

J.C. Penney Company, Inc.; Target Corporation; Wal-Mart Stores, Inc.

Chronology

• Key Dates
• 1988 Specialty Retailers, Inc. (SRI) is formed to acquire Palais Royal, Inc.
• 1992 SRI acquires Colorado-based Fashion Bar, Inc.
• 1993 SRI's board of directors forms Apparel Retailers, Inc. (ARI), which becomes the parent company of SRI.
• 1994 ARI acquires Beall-Ladymon, Inc.
• 1996 The company goes public and changes its name to Stage Stores, Inc.
• 1997 C.R. Anthony Company is purchased.
• 1999 Stage reports a loss of $129 million for the year.
• 2000 The company files for Chapter 11 bankruptcy protection.
• 2001 Stage emerges from bankruptcy.
• 2003 Peebles Inc. is purchased.
• 2006 B.C. Moore & Sons Inc. is acquired; the company begins trading on the New York Stock Exchange.