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Service's cash flow squeeze prompts cost-cutting efforts - Service Merchandise

Service's Cash Flow Squeeze Prompts Cost-Cutting Efforts

BRENTWOOD, Tenn.--The efforts Service Merchandise has undertaken to restore profitability are showing the first glimmerings of success.

But the nation's largest catalog showroom chain remains locked in a cash flow squeeze that must be loosened by March 31, 1988, when $147 million in short-term debt that 11 banks hold comes due and must be renegotiated.

Among steps taken to cut costs and improve operations, Service has: . Cut payrolls by 2,000, including 200 employees at its corporate headquarters south of Nashville, Tenn., to 22,000; . Halved the number of planned store openings for 1987 to 10 from 20; . Closed 14 apparel centers in showrooms acquired when it purchased the H.J. Wilson chain; . Halted an experiment to install drive-up windows; . Remodeled 12 stores to the latest Service clipboard format to save labor costs; . Standardized the inventory of its two Zimm's jewelry stores to the Service jewelry catalog format, with expectations of expanding the Zimm's chain if the change proves successful; . Set a goal to derive 25 percent of sales from high margin "pure jewelry," including diamonds, watches, gold, goldfilled and sterling pieces.

As an indicator of some success, Service reported a slim operating profit of 3 cents a share in its second quarter, compared with a loss of 17 cents a share in the year-earlier period.

In the latest example of cost cutting at headquarters, Service has abolished the position of secretary/treasurer after Richard Schenck took an early retirement from the post late last month. Chief financial officer S.P. (Pete) Braud has assumed the duties of corporate treasurer. And the corporate counsel has taken over the responsibilities of secretary, Braud said.

Financial analysts are projecting a 1987 yearly profit of anywhere from 20 cents to 80 cents a share, contrasted with a loss of $1.41 a share in 1986. Nonetheless, analysts are calling 1987 a make or break year for Service because of its ongoing cash flow problem.

Moreover, Service is making little progress in squeezing out excess square footage from its 303 stores. Much of the excess space was acquired when Service bought the H.J. Wilson and Ellman's chains in 1985.

During an interview in his office, Ray Zimmerman, chairman, chief executive officer and president, estimated that only about 100 of his stores fit the 60,000-square-foot prototype established at its showcase store in the nearby Hickory Hollow shopping center. Some stores range up to 100,000 square feet, and Service hopes to lease out that excess space as an alternative to closing stores. Accordingly, about 200 stores either need remodeling or have excess space to be leased.

Zimmerman said he is willing to lease out an entire store if a suitable, smaller replacement could be found close by, so existing shopping patterns would not be disrupted. "We want to replace any store that doesn't look like our prototype," he said.

Zimmerman, who personally keeps his hand in real estate transactions for his company, even though Floyd Dean is vice president for property development, said Service has made "very slow" progress in leasing the excess space.

As a further cost-cutting move, Service is remodeling 12 stores in 1987 to a "clipboard" store concept (without a self-service section). This concept involves less payroll costs than self-service, Zimmerman said.

Service is also focusing on high-margin jewelry in its prototype, including $5,000 and $6,000 diamond-cluster rings. Zimmerman said his goal is to generate 25 percent of sales from "pure jewelry" merchandise. He declined to release the current jewelry percentage of sales at Service.

In a standardization move, Service is converting its two Zimm's jewelry stores to the same jewelry mix that the showrooms carry, rather than let Zimm's buyers determine what inventory to purchase.

Service also scrapped plans to install drive-up windows at its stores so customers could call in orders in advance and pick up merchandise without entering the store.

In a separate interview, Braud explained why Service got into a bind. After acquiring Mr. HOW (expanding it rapidly) and picking up Wilson, "we let our expenses grow faster than sales."

In its emphasis on controlling costs, Service is "looking at everything from a standpoint of, `Is it necessary?'" Braud said. "We're taking the posture that every vacancy presents the opportunity to eliminate a job." But in cutting personnel, Service is focusing on support people, rather than store employees, he added.

Braud said it is "a bit of a stretch" to call 1987 a make or break year for Service.

"We are very close with our information," he said. "That leads a lot of people to jump to erroneous conclusions. A lot of people are missing the basic strength of Service.

"We're a simple business, and we overcomplicated our lives. Now we're focusing on what we do best and getting our costs under control."

To ease its liquidity crunch last fall, Service floated $300 million in 10-year notes, converting a large chunk of its short-term debt into more costly, 11.75 percent, but later-maturing (1996) debt.

Indicative of more downsizing, Service has built some 30 mini-showrooms of about 30,000 square feet, or half its full-size prototype, which stock only catalog merchandise and none of the Not In Catalog items, he said.

"Wherever we can find room for a mini we put one in if we can't find room for a full showroom."

PHOTO : Ray Zimmerman, chairman and ceo, has returned to basics in an attempt to regain profitability for the chain.