WASHINGTON -- Up until two years ago, Merry-Go-Round Enterprises Inc. was one of the hottest young fashion retailers, dictating trends like the leather bomber jackets inspired by the movie "Top Gun" and sexy beaded bustiers for Madonna wannabes. Now,...
WASHINGTON -- Up until two years ago, Merry-Go-Round Enterprises Inc. was one of the hottest young fashion retailers, dictating trends like the leather bomber jackets inspired by the movie "Top Gun" and sexy beaded bustiers for Madonna wannabes. Now, the Joppa, Md.-based retailer has become the latest fashion victim.
After an unsuccessful attempt at restructuring its loan agreements, the retailer, which operates 1,450 stores in 44 states, filed a Chapter 11 petition to reorganize on Jan. 11. The filing came on the heels of its dismal showing during the holiday season -- a 16 percent drop in same-stores sales. In its worst period yet, Merry-Go-Round, which operates under such names as Merry-Go-Round, Attivo, Dejaiz and Cignal, recorded a $38.5 million loss in its third quarter ending Oct. 30, 1993. That included a $35 million charge for inventory writedowns, in particular its slow-moving hip-hop items, and costs for closing about 80 stores.
While analysts say that the company's fall isn't permanent, it illustrates how a competitive environment, along with a few bad merchandising bets, could make a once-hot company cool off with its young customers so fast.
"The young market has changed, and apparently Merry-Go-Round wasn't changing with it. It was becoming reactive, rather than proactive," said Peter Schaeffer, partner at Johnson Redbook Service, a New York-based retail and apparel research firm.
A major problem for Merry-Go-Round, which hit $877.4 million in sales for fiscal 1993, is the customers themselves. Shunning malls in favor of foraging for ripped jeans at vintage shops, this new breed of teenagers has been particularly cruel to Merry-Go-Round as well as other mall-based young trendy chains, such as those operated by St. Louis-based Edison Brothers Inc., Santa Ana, Calif.-based Pacific Sunwear and Irvine, Calif.-based Wet Seal, which have all reported lackluster sales in the past year.
Carol Farmer, who owns a Boca Raton, Fla.-based consulting firm bearing her name, said, "Unlike the baby boomers when they were younger, this new generation is not idealistic. They look at life as one big cafeteria. They have more options beside the mall. They're great cruisers and pickers, shopping at thrift stores."Sources note that the fashion trend toward more conservative, woodsy looks of the TV hit show "Northern Exposure" have also not been a boon to Merry-Go-Round, which prefers to dress up teens in bondage fashions, like midriffs and slinky spandex dresses.
But while industry sources acknowledge this new difficult environment, some put more of the blame on Merry-Go-Round itself. In interviews with analysts and former employees, a picture emerges of a company that ran by the seat of its pants, dispatching its merchandisers on freewheeling buying sprees without any strict adherence to budget constraints. That strategy may have worked when the company was small, but it proved problematic when the company started expanding rapidly over the past five years. With less than 400 stores in 1988, it went on an acquisition kick that involved buying up such chains as Silverman's/His Place in 1989, Club International in 1991, Networks in 1992 and most recently Chess King in 1993.
"Merry-Go-Round's problems were simmering for a long time, and they are just boiling over now," said a former company official, who did not want to be identified. Wall Street analysts say that the last straw was the acquisition of the beleaguered 476-unit Chess King chain from Melville Corp. in March 1993.
"They just couldn't turn around Chess King and make it happen, and here they were stuck with all of those stores," said Schaeffer.
At the root of Merry-Go-Round's problems was its merchandising team. One criticism was that too many of its merchandisers were nurtured from the store level, hired fresh out of high school without any formal education. Stuart Lucas, the chief merchant in charge of its men's business and a 20-year MGRE veteran, who was dumped in December as part of its ongoing purge of merchandisers, epitomized the company's promotion philosophy.
Hired right out of high school, Lucas, who received high marks from analysts, was brought up through the ranks of executive management. As reported, Lucas has been recently succeeded by the company's pony-tailed co-founder and chairman, Leonard (Boogie) Weinglass, who emerged from semiretirement in September to take charge of all merchandising decisions. As reported, Weinglass has also been named chief executive officer, succeeding Michael D. Sullivan, who will stay on as president.But while industry sources applaud this philosophy of promoting within, they assert that too few people in the company had the skills and the training to run an operation of that magnitude. On the other end, they also noted that there were a number of baby-boomer merchandisers who were not in touch with the younger customers.
As a result, analysts say, the company made poor buying decisions such as pushing outlandish fashions, like $400 poodle trim black leather coats, instead of interpreting classic trends that were hitting the scenes. It also did not tailor its merchandise mix to specific areas and stayed too long on an item, particularly in hip-hop clothing.
"They were looking for the extreme," said Schaeffer, noting that the retailer missed out on such trends as flannel shirts. "When that didn't work, they started pushing outerwear and denim. But it gave customers no reason to shop there."
In a recent telephone interview, Weinglass admitted to the company's losing focus over the past nine months and acknowledged all of these problems.
"The company lost direction and got away from the basics of retailing that we were known for, but I'm going to bring it back," he asserted. He noted that among the bad picks were wide-leg jeans and bell-bottoms, both of which didn't sit well with the customer.
"We had a great track record, but unfortunately we reached a snag," Weinglass said. "It was magnified by too much inventory. We took a huge writedown and our banks panicked and our vendors panicked."
But he pointed to the fact that the company has $100 million in cash as well as a $125 million debtor-in-possession package from CIT Group, though he noted that some vendors were still skittish about supplying them goods.
Weinglass emphasized that the company is taking on a more conservative direction for spring. Weinglass also plans to increase the percentage of women's wear at its Merry-Go-Round stores to about half of the division's inventory, up from 35 percent. Plans call for eventually increasing it to 65 percent.
He also emphasized that he expects to hire a head merchant within about three months. He is also looking to beef up its merchandising team with outsiders from other specialty chains and is giving some of his employees in their 20s, who had back-office jobs, more opportunities to shop in the markets.Weinglass is also streamlining inventory and is working to insure that the merchandise mix in the stores is tailored to specific areas.
"We are going to stick by our budgets, and we're going into regional buying," he said.
He also added that the company is currently analyzing the profitability of all of its stores and may close more than the 80 units, as reported. The number of store closings, however, has not been finalized.
At least one supplier views these merchandising changes as positive. "Boogie Weinglass has come in with an open mind and is building a team for change," said Vincent Nesi, president of Bugle Boy Industries, in Simi Valley, Calif. "I think he understands that Merry-Go-Round can no longer be too extreme in their fashions. They have to be a little more conservative and serve the national corridor."
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