Value Merchants Inc.

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Value Merchants Inc.

710 N. Plankinton Avenue
Milwaukee, Wisconsin 53203
U.S.A.
(414) 274-2575
Fax: (414) 274-2930

Private Company
Incorporated: 1944
Employees: 2,200
Sales: $363 million
Stock Exchanges: New York
SICs: 5331 Variety Stores

Value Merchants Inc.’s Everything’s A Dollar subsidiary operated more than 250 discount stores throughout the nation going into the mid-1990s. Founded in 1944, the company grew modestly during the first couple decades of its existence. During the late 1980s and early 1990s, however, Value Merchants grew explosively. Its rapid expansion ultimately exposed weaknesses in the company, though. In 1993 Value Merchants filed for Chapter 11 bankruptcy protection. The company was still struggling to reorganize and recover in 1995.

Value Merchants Inc. was formerly known as the Wisconsin Toy Company. The name was changed in 1990 when Steven Appel became chief executive of the concern. He replaced Philip Cohen, who had served as CEO of the company since 1960 (his father had founded the organization). During the mid-19008 the Cohens built their enterprise into a successful U.S. toy wholesaler. Philip Cohen took the operation public in 1969—it was incorporated at that time as Wisconsin Toy Company—in a transaction that shifted ownership to a holding company, but he continued to successfully run the organization.

By the 1980s, in fact, Wisconsin Toy was one of the largest competitors in its specialized niche. Wisconsin Toy’s annual sales were about $25 million by the early 1980s, about $800,000 of which was netted as income. In addition to its Milwaukee headquarters, the company had a sales office and showroom in New York City and maintained distribution centers in New Jersey and San Francisco. The company profited by purchasing large quantities of close-out inventory from a wide variety of toy makers, including major manufacturers in the United States and Asia. It sold the merchandise to U.S. retailers—including several major retail chains—who used the inexpensive items to promote foot traffic in their stores and boost sales of goods that had higher profit margins.

Until 1984 Wisconsin Toy sold its merchandise only at the wholesale level. Executives chartered a new course for the company in 1985. Rather than sell their goods to other retailers, who usually increased the price, they reasoned that they could sell directly to the public at wholesale prices. In 1985 Wisconsin Toy opened its first retail outlet—a Toy Liquidators discount store in Virginia. The success of that store prompted the company to open four more outlets in Indiana within a year and to plan launches of several more shops in 1986 and 1987. Cohen, who turned 68 in 1987, remained on the management team, but his role was reduced. In 1987 Leslie Mendelsohn was named president of the company. Mendelsohn, age 40, had served as an executive at Federal Wholesale Company, a West Coast toy wholesale company.

By June of 1987 Wisconsin Toy operated 50 Toy Liquidators retail outlets. In an effort to raise $15 million to $18 million of capital for expansion, Wisconsin Toy’s parent company, Zilber Ltd., took the company public. Additional stores were acquired or built. Although sales and profits in 1986 remained at 1984 and 1985 levels, revenues bolted about 70 percent in 1987 and net income surged to a record $2.3 million. Although Wisconsin’s wholesale operations continued to account for the majority of sales and earnings, the company was clearly headed in a new direction; away from wholesaling and toward the growing U.S. discount retail market. Because of its access to low-cost toys and other merchandise, Wisconsin Toy seemed well positioned to compete.

During the late 1980s Wisconsin Toy added 40 more Toy Liquidator establishments to its portfolio, bringing the size of its Toy Liquidators chain to 90 by 1990. In 1989 Wisconsin Toy generated $53 million in sales (fiscal year ending January 31) and earned nearly $3.6 million in net income. But while the company’s growth during the late 1980s was impressive, it was a mere prelude to the expansion that would occur during the early 1990s. In 1989 Wisconsin Toy departed from its historic emphasis on toys. It purchased Everything’s A Dollar Inc. (EAD), a chain of about 60 discount retail stores that had previously been a Wisconsin Toy customer. The shops were similar to Toy Liquidators, except that they sold all kinds of different merchandise ranging from shampoo and sunglasses to toys and mustard.

The EAD concept was relatively simple. The company purchased huge lots of items at cut-rate prices. The goods were typically excess inventory or items that had run their course in the mainstream marketplace. The products were shipped to stores and sold, on average, for a small profit. The draw for customers was that virtually every item in the store cost one dollar. The concept was especially attractive to teenagers, who could walk into an EAD shop with five dollars and leave with a bag full of goods. But the dollar strategy had also proved increasingly popular with other segments of the value-oriented shopping population that were looking for low-cost gifts and household goods.

EAD stores were typically about 3,000 to 4,000 square feet in size. Most of them were located in large metropolitan shopping malls rather than the low-rent discount factory outlets in which Toy Liquidators were stationed. Neon lights or back-lit glass blocks near the entrance enticed buyers, and progressive decor and lively music inside facilitated an atmosphere of impulse buying. Indeed, the stores relied on high volumes of impulse purchases to squeeze a profit out of the low-priced goods. While the typical customer transaction was only a little more than $5, an average new store was projected to register more $1 million in sales during the first year of operation.

The EAD acquisition effectively doubled the size of Wisconsin Toy’s swelling retail division. Moreover, the EAD stores seemed like a perfect compliment to Wisconsin Toy’s existing operations. EAD provided a huge new distribution channel for the company’s wholesale purchasing division and added a new dimension to its discount retail business. At the time, the dollar discount concept was just beginning to get popular and the potential of the industry seemed huge. Wisconsin Toy hoped to parlay its experience in the wholesale business into a leadership position in the rapidly growing industry. To do that, it would need to expand rapidly to sustain its lead over its discount retail peers.

To guide Wisconsin Toy’s evolution into a large discount retailer, Wisconsin Toy’s directors hired Wisconsin native Steven Appel, a self-described hard worker with average technical skills. Appel grew up in a working class household, married at the age of 18, and was a working father by the time he entered the University of Wisconsin at Milwaukee in 1960. Appel took on a full course load despite his responsibilities. To accomplish the feat, he learned to negotiate with his professors. At the beginning of each semester he approached them with a proposition: He would attend all classes and take all the exams if they would not require him to turn in homework assignments. If the professor refused, he simply dropped the class and added a different one.

Appel graduated in four years with a degree in accounting, a profession that his father had urged him to pursue because he had a friend that was a successful accountant. After graduation, Appel accepted a job as a staff accountant with Arthur Anderson & Co. His penchant for hard work served him well and he steadily progressed through the ranks. “For the first time in my life, I was exposed to the vastness of the world,” Appel recalled in Business Journal-Milwaukee. “I also realized how much I could grow if I committed myself to a career with Arthur Andersen and, despite average technical skills, I believe my sheer desire helped form a strong work ethic and channel my interpersonal skills to achieve my goals.” Appel’s energy and drive was also evident in his personal life; he managed to qualify for the Boston Marathon at the age of 41 with a 26-mile time of three hours and three minutes.

By 1987 Appel served as managing director of Arthur Anderson’s financial consulting services division. Among the companies he advised was Wisconsin Toy Company. Executives there were impressed by his work and eventually approached him about joining the company. Appel accepted and joined Wisconsin Toy in 1989 as chief operating officer. When Cohen officially retired as CEO in June 1990, Appel took the reins. By that time the Wisconsin Toy Company operated nearly 150 stores, including more than 60 BAD and 80 Toy Liquidators (some of the toy retail outlets were called Toys Unlimited). To reflect Wisconsin Toy Company’s growing emphasis on retail and general merchandise, Appel changed the organization’s name to Value Merchants Inc. in July 1990.

Under Appel’s direction, Value Merchants intensified its expansion efforts during the early 1990s in an attempt to assume a dominant position in the discount bulk merchandise industry. It purchased the remaining 20 percent of the EAD chain that it didn’t own and added 100 new stores during 1991. By the end of that year, Value Merchants held more than 200 EAD stores stretching from New York to Florida and as far west as Texas. By April 1992 Value Merchants owned 230 EAD stores and 110 Toy Liquidator establishments. It made further plans for growth, pursuing experiments with such new types of EAD outlets as a 9,000-square-foot superstore on the East Coast and downtown shops in Miami.

Value Merchants’ financial figures mirrored the blistering growth rate. Although the company’s debt load increased, sales doubled in 1990 (fiscal 1991 ending January 31) to a whopping $140 million. During 1991, moreover, revenues bolted to $235 million and revenues vaulted to a peak of $9.2 million. Investor enthusiasm sent the company’s stock price rocketing to more than $34 per share.

Value Merchants continued to add outlets at a fast pace throughout 1992. By the end of the year, in fact, the company boasted a network of 540 locations in more than 40 states. That explosive growth, however, belied serious structural problems in the Value Merchants organization. In 1992 the company’s financial performance began to slide as the profitability of its stores waned. It became apparent to investors that executives had tried to grow too quickly and had neglected to ensure that existing operations remained profitable. “Nobody held a gun to their head and said grow by 300 stores,” noted one analyst in 1993 in the Business Journal-Milwaukee. “They obviously bit off more than they could chew.” Value Merchants’ stock price plunged to $7.75 per share in January 1993. Appel quickly squelched 1993 expansion plans and laid off workers at the company’s Milwaukee headquarters.

Appel took responsibility for Value Merchants’ problems, but he also pointed to some untimely setbacks that had rocked the company. The company, for example, had expected to have access in April 1991 to an $85 million financing package that would be used to fund store openings and infrastructure plans. When the money was delayed until August of that year, a severe cash crunch ensued. One result was that several stores opened late in the year and missed out on most of the important Christmas season. At the same time, Value Merchants invested heavily in advanced computer systems and new satellite distribution facilities designed to support its swelling national retail chain. Analysts noted that while such steps were perhaps necessary to manage the company’s growth, the short time period involved required that the execution be flawless.

Although Value Merchant’s revenues ballooned to $364 million in fiscal 1993, it posted a discouraging $8 million deficit. Worried investors pressured company executives to bandage bleeding balance sheets. But the company’s problems only worsened. Appel responded by shuttering some unprofitable stores and working to increase the performance of the existing chain. The effort was insufficient. Faced with looming deadlines for payments to creditors, Value Merchants and its HAD subsidiary filed for bankruptcy in December 1993. The move allowed the company to keep cash flow from its Christmas sales while it worked to reach an agreement with creditors in 1994.

During 1994 Value Merchants jettisoned its original toy wholesale purchasing division and the remaining 84 Toy Liquidators outlets. Consolidated Stores Corp. bought the chain and Value Merchants used the cash from the sale to reduce its debt. The company also eliminated more than 150 EAD outlets. Entering 1995, Value Merchants consisted of a chain of about 265 EAD outlets, roughly half the number it operated during the peak of its expansion in 1992. Value Merchants eventually proposed an agreement with creditors during 1994 that would give them ownership of most of the company. “This plan is the culmination of an aggressive effort to improve the financial condition and future prospects of Value Merchants and to deal equitably with stake holders,” Appel said in December 1994 in the Business Journal-Milwaukee. The long-term future of the discounter was still in doubt going into 1995.