New CEO tackles complex woes of Merry-Go-Round

THE BALTIMORE SUN

Friday, July 7: Richard P. Crystal, a top executive of R. H. Macy & Co., boarded a plane in New York bound for Baltimore, where it took a scant seven minutes to finalize his contract to become the next president and chief executive officer of Merry-Go-Round Enterprises Inc. He immediately flew back to New York.

Sunday, July 9: Mr. Crystal returned to Baltimore.

Monday, July 10: Three weeks earlier than planned, he started his first day on the new job.

There just was no time to spare.

The question is, how much time does Mr. Crystal have to turn around the bankrupt fashion retailer?

Like almost everything else at Joppa-based Merry-Go-Round, there are no simple answers.

In one corner, there are apparel gurus like Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting firm in New York, who says: "If there is no progress by the Christmas season this year, you have a cadaver."

But others, such as attorney Stephen Selbst, representing the company's equity committee of shareholders, assert that it will take more than a year before Mr. Crystal can even begin to forge an imprint.

"My committee is not nearly as pessimistic as the industry analysts," Mr. Selbst said. "We believe there is a core business that can be revived. It's easy for people simply looking at the aggregate numbers to draw a pessimistic conclusion . . . but we remain confident we have the right guy."

There is at least one thing all parties agree upon: The company numbers are not good. Sales at stores open at least a year, a benchmark measurement of performance because it factors out sales in new stores, have not registered a gain since December 1992. Shareholder equity has plummeted from $191.2 million in fiscal 1994 to $5.7 million a year later. More than 460 stores have been shut and 4,000-plus employees laid off since the company filed for reorganization bankruptcy protection in January 1994.

But Mr. Crystal, Merry-Go-Round's fourth CEO in two years, insists he hasn't contemplated the pressure or prospects of lasting long enough to fulfill his three-year contract -- a package worth well in excess of $3 million -- to reverse the fortunes of a chain of about 980 stores geared toward teen-agers and young adults.

"I'm not viewing this as pressure; I'm viewing this as a challenging opportunity, and I believe that over a period of time this will be a successful company," the 50-year-old veteran of New York apparel said in his empty new office on Day 3 of the job.

Mr. Crystal's crisis-management predecessors had great expectations, too, drawing up a business plan that projected a 10.5 percent increase in same-stores sales for fiscal 1996 ending next January. So far, the best month for comparable sales was April, when the company broke even. Every other month this year has brought double-digit drops.

But to their credit, the two turnaround specialists -- Thomas C. Shull, acting as chairman and CEO, and James Kenney, serving as president and chief operating officer -- did a good deal of what they were asked to do, eliminating more than $60 million in annual expenses through store closings, layoffs and by slashing other costs.

But that hasn't stopped the bleeding. June sales were down $15 million, and the company lost $19.2 million for the first quarter that ended April 29, after a year that lost $186.3 million.

"Sure there's anxiousness about this," said Herb Stiles, portfolio manager at T. Rowe Price Associates Inc., a major shareholder with about 5 percent of Merry-Go-Round's stock. "Where is it going to stabilize? When is it going to start showing what its true value is?"

Probably not during the important coming back-to-school season, industry analysts and others agree. Apparel orders, made months in advance, are already in, leaving little for Mr. Crystal to affect until the next major shopping season: Christmas.

"Let's put it this way: If he gives evidence early on, within the next two or three months, that he is initiating a set of strategies that one must conclude are promising, he may have a year, probably not a year, probably through Christmas," said Kurt Barnard, president and publisher of Barnard's Retail Marketing Report, a forecasting newsletter in New Jersey.

The holiday season

Mr. Crystal acknowledges that, "for the most part," his impact will first be felt during the holiday season. But he cautioned: "Not everything is hanging on one Christmas. . . . One month should not be the be-all and end-all."

Nor should anyone expect one single devastatingly effective item, a Pet Rock-like phenomenon, to salve sales. "Obviously, if some great hot item came along, that would be helpful," he said. "But I don't think you can hang your hopes on a single item."

It's not that simple, analysts agree.

Not to be ignored are things such as the national economy. In June, still operating under bumped-up interest rates, consumers spent cautiously, which was reflected in sluggish sales at specialty apparel chains like Limited Inc. and Gap Inc.

"Merry-Go-Round is up against a tough situation because the U.S. apparel industry -- and particularly their end of it -- is really in a downturn, and demand is really well below expectations," said Otto F. Grote, a retail analyst with Derby Securities in New York.

"One of the things the new executive has to do is reposition Merry-Go-Round so that it's not so economically sensitive and fashion-forward. Then he has a better chance."

Otherwise, there is the draconian approach: More store closings. Already, there is speculation that the company may be forced to close a minimum of additional 50 stores, or as many as 200.

In particular, there has been talk about renaming and/or closing some of the chain's Dejaiz/Attivo store division, a source said.

But Mr. Crystal, just beginning to meet his new employees, said, "I can't make those kinds of decisions at this point."

Besides, observers note, the new CEO was brought in because of his merchandising and fashion acumen, not for his carving knife.

"They've already put the meat ax to the company -- I don't think they hired him to be an undertaker," said Allan G. Millstein, editor and publisher of the Fashion Network Report, a New York-based retailing newsletter.

A year to 18 months

If Mr. Crystal is to resuscitate Merry-Go-Round, Mr. Millstein said, it will take time -- a year to 18 months:

"He isn't going to turn floss into gold overnight. When you have that many stores, it's not a matter of a single item, but [coming up with] a fashion concept so that you excite the customer so that they come into the stores. And also, you have to have enough [profit] margin in the product so that you're left with a respectable bottom line."

Mr. Crystal is familiar with bottom lines. A New York native, he had been with Macy's since 1974 -- except for a stint from 1979 to 1982 -- serving as chairman of Macy's product development division, where he was responsible for all private-label product development worldwide. He also served as chairman and CEO of Macy's specialty store division.

In more than two decades in the business, he has arrived at a simple conclusion: "I don't think I really have a worldview of merchandising," he said. " . . . It's understanding the business and understanding your customer."

Sees the potential

Mr. Crystal has had a personal acquaintance with that sector of the market, having raised three girls, now ages 9, 13 and 22, and a boy, 19 years old. And he sees the potential for Merry-Go-Round. "They are the most receptive to newness and change," he said of young adults. "I like to look on the positive parts. It's a customer with a short memory."

The same, however, can't be said of the company's creditors, who naturally want their money.

That should happen once the company settles on a reorganization plan, emerges from Chapter 11 bankruptcy and issues new shares to creditors, who then become shareholders. Under the current plan, creditors would own 75 percent of the company, while shareholders retain 25 percent. In addition, the creditors committee would appoint five of the seven members to the board of directors; the equity committee would name two.

With Mr. Crystal's arrival, all of that could change, perhaps meaning a different ratio of ownership favoring the creditors. However it shakes out, analysts say, the new CEO's fate may rest in the hands of creditors.

"How much time does he have? As much as Fidelity thinks," said Peter Chapman, a minor creditor and president of Bankruptcy Creditors' Service Inc. in New Jersey.

Boston-based Fidelity Investments is Merry-Go-Round's largest creditor, holding more than $90 million, or about 40 percent, of the company's estimated $225 million debt, Mr. Chapman said. Fidelity officials could not be reached for comment.

Keeping creditors happy won't be Mr. Crystal's only concern. There is, of course, the matter of his own career.

"If this thing bombs, it's a big black mark on him," Mr. Chapman said. "How employable are you? It is a considerable risk for him. If I were in his position, I'd be searching for a hot, hot product that's going to boost sales through the roof."

For Merry-Go-Round, it may not be that simple.

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