WALL STREET DISCOVERS VALUE IN VALUE CITY’S INTENSIVE GROWTH PLAN

Byline: Valerie Seckler

NEW YORK — Until recently, Value City and its chief executive officer, Jay Schottenstein, kept a low profile, content to open a new store every two or three months, or whenever the next decent site to be leased at $3 per square foot cropped up.
For nearly 76 years, the off-price department store flew below the radar screens of most investors, while taking a quiet stance among designer resources and full-price competitors alike by not advertising its high-profile labels, including Calvin Klein, Donna Karan and Ralph Lauren.
That’s all changing. Over the last several months, the operation has been closely tracked on Wall Street, winning “buy” ratings and earnings-estimate increases from a handful of retail analysts now covering it.
Just last Monday, David Mann, retail analyst at Johnson Rice & Co., a New Orleans brokerage, raised his forecast for fiscal 1997, predicting Value City would net 95 cents a share in the year ending July 26, 1997, up from an estimate of 91 cents. In fiscal 1996, the chain earned 68 cents a share.
The analyst also boosted his 12-month stock price target to 18, from 17. The stock closed at TK Tuesday, up/down TK, on the New York Stock Exchange. Value City stock has shot up TK percent since October, when it was trading at $9 and change. This increase has come since the stock got a “buy” rating on Oct. 28 from Robert Buchanan, senior retail analyst at NatWest Securities.
“Wall Street likes consistency, and there’s a consistent growth plan now,” said Mann, who also initiated coverage of the chain last month with a “buy” rating. “Between fiscal ’91 and ’95, most of their store openings depended on a rent ceiling of $3 per square foot. They’re being more liberal now, to spike their growth.”
Indeed, over the last 14 months, Value City has been opening stores at the brisk clip of one a month, compared with the 7 new stores it opened annually between fiscal 1991 and 1996.
“We’re growing faster because more advantageous real estate opportunities are coming along,” said Bob Wysinski, senior vice president and chief financial officer, in an interview Tuesday.
“We’re gravitating towards New York and we’ll probably eventually get into New England,” Wysinski continued. In response to a question, the cfo said Value City may look at any available leases for Bradlees and Caldor sites, two Northeast regional discounters operating under Chapter 11 that might seek to reject some leases as part of their reorganizations.
“We’re always on the lookout for chains seeking to get rid of a few leases, especially in metropolitan markets,” Wysinski said.
“They hadn’t been growing aggressively enough to make Value City a visible stock,” said Thomas Filandro, retail analyst at Gerard Klauer Mattison & Co., who also lifted his 1996 estimate Monday, by 2 cents a share, to 95 cents.
Although Filandro did not follow the chain very closely since its initial public offering in 1991, he initiated coverage with a “buy” in June, when it became apparent Value City was accelerating expansion.
Also speeding growth is the repair of a software glitch at Value City’s state-of-the-art flat apparel distribution center, opened two years ago in Columbus, Ohio. The highly automated, 200,000-square-foot site — which handles about 38 percent of the chain’s goods via three miles of conveyors and radio-frequency tracking technology — was opened without testing the software. The result: items were directed to the wrong places in the wrong quantities.
“Now that we’ve got the merchandise flowing real good to the stores, we can focus on growth,” said Wysinski. Aiding the effort are the rolling carts Value City developed to send floor-ready goods from trailers to the stores, eliminating time in the back room and slashing payroll by $1 million a year.
Further, since 1994, the firm has improved execution of logistics enough to give it a leg up on competitors when it comes to hustling sharply priced, in-season goods onto the selling floor, according to retail analysts.
“A big plus for Value City is that it can put goods it buys today on the selling floor in a week, rather than several weeks like its competitors,” said Mann. “Most of the other off-price retailers don’t buy nearly as many in-season closeouts and overruns. Value City tries to buy as late in the season as possible, to get the sharpest pricing.”
In contrast, off-pricers such as Ross Stores, the 313-unit Newark, Calif.-based chain, pack away one-third of the goods they buy to be sold late in the season or in the following season, Mann noted.
Much of the credit for these improvements is given to Don Andrus, the senior vice president and chief operating officer hired by Value City in September 1995 from May Department Stores Co. Andrus has aided a management team that was being stretched too thin between operations and merchandising, retail observers pointed out.
Instrumental in the makeover of Value City’s format, said analysts, have been the addition of secondary aisles, making it easier for shoppers to find designer-label treasures; the implementation of smaller fixtures and individual vignettes to replace some rounders and pipe racks, and the use of more, better-placed signs.
“Andrus has brought a layer of controls to store operations,” said Mann, who noted that store costs have dropped 300 basis points, as a percent of sales, since the senior vice president joined Value City.
He has also brought changes such as reviewing sales and margins store-by-store each week, instead of every few weeks, and has tweaked store hours and staff so that Value City will lose just two selling hours this holiday season, despite the five fewer selling days, analysts observed. The hours have been made up by calculating the time an average sale transaction takes to complete, and adding extra staff to work at more checkout registers, to compensate for the shorter calendar.
What’s grabbed investors’ attention as well is the off-pricer’s plan to accelerate store openings — and mine new urban markets — instead of tying growth to the availability of dirt-cheap leases. Wysinski said Value City is shopping for four or five sites in the Washington market, where it has one store, in Iverson, Md.; additional sites in Atlanta, where it has opened three stores in the last 12 months; a couple of doors in Charlotte, N.C., which it entered with one store a year ago, and two in Memphis, which it entered this month. It is also scouting for a location in Lexington, Ky., a new market.
“I believe their growth focus will be on the Eastern seaboard, as it should be,” said Filandro. “It’s packed with a dense, value-oriented population that can drive Value City’s sales.”
That, said analysts, is what ultimately will catapult the chain to the profits — and stock price — they believe it is capable of reaping. Wall Street sees Value City topping sales of $1 billion in fiscal ’97, a leap of 25 percent over the $798 million in its first year of public ownership. Profits of 95 cents a share would mark a 40 percent jump over last year.
With new stores averaging annual volumes of $13 million, including some such as the Paramus unit that are eyeing twice that, analysts forecast top-line gains will speed up soon. The Paramus door is expected to top the $18 million budgeted for its first-year sales by 39 percent, racking up $25 million. More than 60 percent of purchases at the store are via credit cards, versus the 20 percent averaged by the chain, and more than half are on American Express cards, reflecting the market’s upscale demographics.
Meanwhile, Value City will keep expanding in a quicker yet more controlled manner, the way Wall Street likes it, holding new stores within a manageable 800-mile radius of its Columbus distribution center — and maintaining the potential to reach 50 percent of the U.S. population within that ring.

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