Merry-Go-Round Slows Down Recession and fashion selection have hurt retailer

THE BALTIMORE SUN

Merry-Go-Round Enterprises has had its problems on Wall Street, where its stock price has dropped by two-thirds since mid-1991.

But the Joppa-based retailer is in more trouble in Professor Rebecca Mihelcic's introductory business class at Howard Community College. Among her students, most of whom fall smack-dab into the 15- to 25-year-old age group Merry-Go-Round claims as its own, the company has little value.

Of the two, the verdict of the junior college students is more ominous for the future of billion-dollar Merry-Go-Round, which operates about 1,450 stores. A dip in stock price can be dismissed as a cyclical phenomenon; the perceptions of its core customers are a retailer's lifeblood.

The company founded by Leonard "Boogie" Weinglass -- who is trying to obtain a local National Football League franchise -- apparently retains a loyal following in the 13- to 18-year-old age group. But according to the students in Ms. Mihelcic's class, about the time students finish high school they also graduate from Merry-Go-Round.

Most of the more than 40 community college students were familiar with the company, which operates several stores at the nearby Mall in Columbia. They tend to spend their money at The Gap, though. And they sharply criticize Merry-Go-Round's fashion selection, prices and service.

"I think the prices are outrageous and the clothes are poorly made," said Valerie Wrightson. "It's just not practical clothing."

"They pressure you to buy things you really don't like, then they don't give you refunds," said Michael Tucker, steamed over an incident in which his 13-year-old sister bought a $150 coat and couldn't return it.

Such sentiments are ominous for Merry-Go-Round, which has posted an eight-month streak of declining comparable-store sales. And the complaints -- combined with merchandising mistakes -- illustrate the thin line between success and failure for a company that makes its money riding fashion trends.

"They're losing market share. That's a very bad sign . . ." said Otto Grote, a veteran retail analyst with Derby Securities in New York. "Once a retailing firm loses market share in the communities where it operates, then you know that the competition is doing something significantly better."

The stock's free fall -- from $21.38 at it peak in July 1991 to $7.25 at Friday's close -- combined with Merry-Go-Round's $2.5 million second-quarter loss, was enough to bring Mr. Weinglass out of early retirement. As the company's chairman and largest stockholder, he'll work as a consultant in the merchandising operation, trying to bring some of his old magic to the company.

Analysts say that Mr. Weinglass' return doesn't indicate a lack of confidence in Chief Executive Michael D. Sullivan. The two men are said to be personally close, and Mr. Sullivan is a member of the group Mr. Weinglass has assembled to acquire an NFL franchise.

Like an NFL owner giving a vote of confidence to the coach of his slumping team, Mr. Weinglass has nothing but praise for Mr. Sullivan, whom he said "has done a phenomenal job over the years." Still, the coach might have the owner looking over his shoulder at practice for a while. Mr. Weinglass said he'll stay "as long as it takes."

Mr. Weinglass said last week that the company is taking steps to address its problems. He attributes the recent sales drought mainly to a "major error" -- plunging headlong into a rap music-inspired fashion trend called hip-hop, which never became popular as expected.

With clothing sales already weak, the marketplace was not forgiving. The slump in comparable sales, a measure of purchases at stores that were open the previous year, hit new depths in August -- Merry-Go-Round skidded to a 16 percent decline.

"We probably would have been down anyway, but if we hadn't have jumped on this one trend, we probably would have been down 4 or 5 percent," Mr. Weinglass said.

Mr. Weinglass doesn't perceive any erosion of the chain's basic franchise. The company's research of teen-agers had not picked up any of the strong negative sentiments expressed by the students in Howard County, he adds.

But the third quarter is unlikely to bring much improvement. Profit margins will take a beating as the chain tries to unload hip-hop fashions at markdowns as high as 70 percent.

Merry-Go-Round, the third-largest retailer based in Maryland, was the darling of Wall Street as it posted strong revenues and profits growth from the late 1980s through mid-1991.

Several logos

Today, the 39-state chain boasts several store logos, including Cignal, Menz, Chess King and Boogie's Diner, as well as the signature Merry-Go-Round. About 850 of the company's stores cater to young men; the remaining 600 serve both men and women. And about 450 of those stores were added this year, when Merry-Go-Round bought the Chess King young men's chain from Melville Corp. -- a deal that ensured the company would pass $1 billion in sales for 1993.

Merry-Go-Round's "fashion-forward" formula brought steady but unspectacular sales and earnings growth from its initial public offering in 1983 until late 1988, when the company caught a fashion wave and rode it for almost three years. It was a halcyon era when the company's buyers seemed to have a psychic connection to their young customers -- pouncing on trends just as they became hot.

Not even the Persian Gulf war and the onset of the recession, which chilled other retailers' sales in early 1991, could bring Merry-Go-Round to Earth. Even as the Scuds were flying in February 1991, the company was posting double-digit increases comparable-store sales.

But in late 1991, as the recession tightened its grip on Merry-Go-Round's customers, the ride stopped. Business plummeted as young shoppers turned their backs on fashion and fled back to bluejeans.

For the first time in years, Merry-Go-Round was caught flat-footed by a shift in the winds of fashion, and Christmas 1991 found it sitting on a pile of clothes nobody wanted. It recorded four straight months of declining comparable-store sales and a 5-cents-a-share loss for that year's fourth quarter.

Six months of declines

In 1992, Merry-Go-Round posted six months of declines in comparable-store sales. Much of that decline was the result of the growing popularity of the company's private label I.O.U. clothing, which sold at lower prices -- and with tighter profit margins -- than brand-name goods.

Nevertheless, by controlling costs and tightening inventories, Merry-Go-Round was able to show a rebound in its earnings and stock price last fall and winter.

Meanwhile, the company was growing steadily through acquisitions: 110 Silverman's/His Place stores in 1989, 10 Club International stores in 1981 and 88 Networks stores in 1992. The mammoth Chess King deal came in March.

But the bold expansion was hurt by another merchandising mistake -- the move toward hip-hop fashions. Merry-Go-Round was following a tried-and-true strategy: Find out what black urban teen-agers are wearing and be the first to bring the styles to the suburbs.

This time it backfired. The winds of fashion shifted, and young white males decided it was no longer cool to imitate inner-city styles. Asked recently what he and his friends thought about Merry-Go-Round, an Owings Mills High School student named Matt cracked: "We're young, white, European-Americans. I used to shop there when I was black."

Judging by interviews at the high school, Merry-Go-Round has managed to retain a strong core of customers in the high schools. When students were asked where they like to shop for (( clothes, Merry-Go-Round was the most frequent answer, and the company's Attivo menswear chain scored well among the boys.

"They have, like, the styles that are in," said a senior named Jackie.

Too expensive

Still, many students said Merry-Go-Round's and Attivo's merchandise is too expensive.

"They pretty much bring the fashions from downtown up here, but they're a little high-priced," said Jahmaul, a junior. "You can go downtown and get the bargains."

So far, most retail analysts have shown remarkable patience with the company's performance, accepting management's explanation that Merry-Go-Round made a fashion misstep during cyclical apparel sales downturn.

"These guys have had great periods and they'll have tough periods. . ." said Steve Ashley, a retail analyst at Cleary Gull Reiland & McDevitt in Milwaukee. "What they can control they have done very well."

But other analysts are less forgiving and criticize Merry-Go-Round's acquisition of the ailing Chess King chain at a time when the core business wasn't on solid ground.

"One problem is that Merry-Go-Round didn't have a format themselves that worked," Mr. Grote of Derby Securities said. "When you don't have a format that works and you go out and make acquisitions, then you just compound your problems."

But Mr. Weinglass defends the Chess King deal. "We're having great early results on Chess King," he said, adding that he expects it to eventually kick in "nice profits" to the parent company.

Today, there are signs of change at Merry-Go-Round -- including cracks in an unusually cohesive and stable management team dominated by a corps of men in their 40s who have worked together since the early 1970s.

In recent weeks, one top merchandising executive was ousted and a number of young people have been promoted into senior buying and merchandising positions, says Mr. Weinglass, agreeing that perhaps management had become a bit too stable. More changes will be announced soon, he adds.

And earlier this summer, Mr. Sullivan acknowledged that Merry-Go-Round's aggressive pace of acquisitions had created some disruptions when he announced that the company was dropping out of the game for now.

Still, a nagging question remains: Can a 51-year-old man who hasn't been a full-time retailer since 1981 -- even one with a ponytail and a hip attitude -- help Merry-Go-Round reconnect with the teen-agers and young adults of the 1990s?

Mr. Weinglass says yes. "I'm excited. . . . I love the morale."

After a recent whirlwind week of three trade shows, he came away convinced that the long "fashion recession" is ending. He predicts a turnaround in all Merry-Go-Round divisions during the fourth quarter.

"We're going to get the next trend," Mr. Weinglass said. "We definitely are."

THE STORES

Merry-Go-Round Enterprises Inc. operated these stores, according to company figures for May.

-#Chain .. .. .. .. .. ..# of stores

Merry-Go-Round.. .. .. .. ..495

Chess King *.. .. .. .. .. .450

Menz.. .. .. .. .. .. .. ...418

Cignal.. .. .. .. .. .. .. ..73

Boogie's Diner.. .. .. .. .. .5

* Estimate. Acquired in 1993

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