Item 1. Business
Service Merchandise, with 400 stores in 37 states, is one of the nation's largest retailers of jewelry, and offers a wide selection of brand-name hardgoods in its other product lines. The major categories of goods offered by the Company are fine jewelry (including diamonds), housewares for the kitchen and tabletop, ready-to-assemble furniture, small appliances, giftware, silverware, cameras, luggage, radios, televisions, and other home electronics, patio, sporting goods and toys.
General
The Company's franchise is built around selling nationally advertised, brand-name hardgoods and quality jewelry at value prices. The customer has the opportunity to pre-select merchandise from the Company's annual catalog which is distributed in the early fall each year. The fall catalog is supplemented by a spring catalog, a gift registry guide, and a combination of direct mail flyers and newspaper inserts distributed approximately every two weeks of the year. The catalogs, flyers and newspaper inserts describe the majority of merchandise offered for sale by the Company and list the Company's selling price and a reference price. The reference price is either the selling price suggested by the manufacturer, or is determined by comparison shopping and/or the application of a standard markup to the cost of an item. The Company's fall and spring catalogs are printed once a year, with selling prices of merchandise adjusted periodically through the direct mail flyers and newspaper inserts to reflect changes in merchandise costs or to provide clearance or sales pricing. Although merchandise is advertised in catalogs, flyers and newspaper inserts, purchases usually take place in a Company store where the customer has physical access to the merchandise. Customers may also purchase goods through mail order, telephone order or via the internet, although these represent a small portion of the Company's total sales.
The typical Service Merchandise store consists of approximately 50,000 square feet of total space and is situated on a stand-alone lot or as an anchor in a suburban mall or strip center. The Company's stores are divided into several departments, including jewelry, "sight and sound", self-service and general showroom. In the jewelry and "sight and sound" departments, merchandise is displayed in showcases, and sales associates deliver items to the customers and accept payment. In the self-service department, customers select merchandise from a shelf or display and take it to a check-out counter to finalize the purchase. In the remainder of the store, a sample of the merchandise is displayed and order forms are available at various locations. After a customer completes a merchandise order form, a store cashier is paid and merchandise is delivered to a pick-up station. The general showroom format permits presentation of a broad assortment of merchandise with limited inventory investment, since only one sample item is actually on display.
Most of the Company's stores display and maintain an inventory (in warehouse space contiguous to the sales area) of substantially all of the catalog items and a limited amount of merchandise not described in the published catalogs. Each store is equipped with a computer which coordinates the inventory tracking and point of sale functions.
Item 1. Business (continued)
Virtually every transaction in the store that involves payment, customer information or inventory is recorded and transmitted, on a daily basis, via satellite to a central information system at the Company's home office. In addition, by use of the computer, the customers may be provided with alternate suggestion items, back-order information, on-line mail orders, gift registry, special orders and layaway information. Most of the Company's stores are equipped with "Service Express", a user-friendly computer which allows customers to verify item availability, place their order, tender payment via credit card, update their address and designate an item as a gift registry purchase.
The Company's computerized daily inventory system tracks the status (on hand, on order, in transit), location and history of inventory in the retail network. The raw data feeds the Company's inventory replenishment system which tracks inventory positions, sales data and sales forecasts and generates either suggested transfers from distribution centers or suggested purchase order quantities. The inventory system also records all sales information to produce daily margin reports, complete with historical comparisons.
The Company's information systems enhance the effectiveness of the catalog mailings and advertising by tracking customers' purchases and tailoring the Company's mailing lists to meet specific objectives. The Company maintains a 24-million customer database of household information which is updated with each purchase. This database allows the Company to target customers based on specific criteria, including the categories purchased, the frequency of purchases and the value of those purchases.
Seasonality and Competition
The Company's business is highly seasonal, with the Christmas season being the largest volume selling period of the year. In preparation for the Christmas season the Company significantly increases its merchandise inventories, which are financed by internally generated funds and short-term borrowings. Fourth quarter net sales accounted for 41.5% of total net sales in fiscal 1996.
The Company is engaged in a highly competitive business and competes with most nationally known jewelry and hardline retail merchandisers, including department, general merchandise, specialty and discount stores. Many of these competitors are larger and have greater financial resources than the Company. The Company considers quality, value, merchandise mix, service and location to be the most significant competitive factors in its retailing business. The Company's profitability is primarily dependent upon the large sales volume generated during the fourth quarter of its fiscal year.
Suppliers
The Company purchases merchandise from approximately 1,700 suppliers, most of which are manufacturers. In fiscal 1996, the largest vendor accounted for approximately 4.8% of total disbursements for inventory items. The Company believes it would experience no difficulty in obtaining quality merchandise from alternate sources. Most merchandise is shipped to the Company's regional distribution centers and transported to the stores by commercial contract carriers.
The Company's direct import program is responsible for sourcing and repackaging many promotional and seasonal items from abroad. Direct imports, which totaled approximately $287 million in fiscal 1996 (compared to $276 million in fiscal 1995), allow the Company to reduce many traditional cost factors, thereby lowering the cost of merchandise sold in several product lines. In addition to its direct import program, the Company imports diamonds, gemstones and gold which are used by contract fabricators in the manufacture of jewelry items.
Item 1. Business (continued)
Employees
The number of persons employed by the Company fluctuates seasonally. During the fiscal year ended December 29, 1996, the number of active employees varied from approximately 27,500 to approximately 46,800 including both permanent and temporary employees. As of December 29, 1996, the Company had 26,261 permanent employees, of whom 83% were hourly-paid personnel engaged in non-supervisory activities; the balance consisted of administrative, executive, distribution center and store management personnel. None of the Company's employees are covered by a collective bargaining agreement. The Company has never experienced a work stoppage due to a labor disagreement and regards its employee relations as satisfactory.
Certain Factors that may affect Operating Results
The Company's liquidity, capital resources and results of operations may be affected from time to time by a number of factors and risks, including without limitation:
(a) trends in the economy as a whole, which may affect consumer confidence and consumer demand for the types of goods sold by the Company;
(b) competitive pressures from other retailers, including specialized retailers and discount stores which may affect the nature and viability of the Company's business strategy;
(c) availability and cost of labor employed and goods purchased by the Company;
(d) costs associated with governmental regulation and legislation;
(e) real estate occupancy and development costs, including the substantial fixed investment costs associated with opening, maintaining or closing a Company store;
(f) advertising costs, including the cost of paper and postage;
(g) availability, costs and terms of financing, including the risk of rising interest rates;
(h) the Company's use of substantial financial leverage and the potential impact of such leverage on the Company's ability to execute its operating strategies, to withstand significant economic downturns and to repay its indebtedness;
(i) costs associated with efforts to improve customer service and maintain an appropriate level of in-stock merchandise;
(j) the seasonal nature of the Company's business and the ability of the Company to predict consumer demand as a whole, as well as demand for specific goods;
(k) the ability of the Company to attract and retain customers by defining the Company's image within the marketplace and providing a positive shopping experience;
(l) costs associated with the shipping, handling and control of inventory; and
(m) potential adverse publicity.
This report includes, and other reports and statements issued on behalf of the Company may include, certain forward-looking information that is based upon management's beliefs as well as on assumptions made by and data currently available to management. This information, which has been or in the future may be, included in reliance on the "safe harbor" provisions of the Private Litigation Reform Act of 1995, is subject to a number of risks and uncertainties, including but not limited to the factors identified above. Actual results may differ materially from those anticipated in any such forward-looking statements.
Item 2.
Item 2. Properties
The Company leases and owns retail store facilities, warehouses and office space. The Company has financed a number of its owned facilities out of internally generated funds. Some owned facilities have ground leases on a long-term basis, some are financed through industrial development financing under which the Company either has ownership or a right to obtain ownership and others are financed by real estate mortgages. The Company occupies office space in two locations in greater Nashville, Tennessee, both of which are owned by the Company.
The Company operated five major distribution centers and one return center (Bowling Green, KY) as of December 29, 1996. These distribution centers are located in Florida, New York, Tennessee, Texas and Nevada and contain an aggregate of approximately 3,493,000 square feet as set forth below:
The Company anticipates that it would be able to obtain suitable replacement facilities should it not be able to renew the above leases.
As of December 29, 1996, the Company operated 400 retail stores (typically consisting of approximately 50,000 square feet) as follows:
Most of the leases contain renewal or purchase options. See the Notes to Consolidated Financial Statements, which are incorporated herein by reference to the Registrant's 1996 Annual Report to Shareholders, for information concerning the Company's lease commitments.
For a listing of store locations, see page 8. The numbers in parentheses show the number of stores per state and where there is more than one store in any city, the number of stores in such city.
Item 2. Properties (continued)
SERVICE MERCHANDISE COMPANY, INC. STORE LOCATIONS
Item 3.
Item 3. Legal Proceedings
L. Luria and Son, Inc. v. Sunrise Mills Limited Partnership, Western Sawgrass Mills Corp., and Service Merchandise Company, Inc. was filed on June 15, 1993 in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida. Claims against Sunrise Mills Limited Partnership and Western Sawgrass Mills Corp. were settled before the case went to trial; therefore, Service Merchandise was the only remaining defendant. In November 1995, a Florida state court returned a verdict of $13.8 million against the Company based on an allegation that the Company interfered with a competitor's right to lease property. The Company has settled this matter for an amount in 1997 which is not material to the financial position or results of operations of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security-Holders
There were no reportable items during the Company's fourth quarter.
Executive Officers of the Registrant (1)
The following is a list of executive officers, their ages, positions and business experience during the past five years as of the date hereof:
- ------------------------------ (1) All Executive Officers serve at the pleasure of the Board of Directors.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock trades on the New York Stock Exchange (NYSE) under the symbol SME. The number of record holders of Common Stock at February 28, 1997 and March 1, 1996 were 6,076 and 6,387, respectively.
High and low closing sales prices as reported by the NYSE for fiscal 1996 and 1995 were as follows:
The Company's Reducing Revolving Credit Facility contains various financial and other covenants, including limitations on the ability to pay dividends. The Company has not declared any cash dividends to shareholders for fiscal 1996 and 1995, respectively.
Item 6.
Item 6. Selected Financial Data
Page 4 under the caption "Selected Financial Information" of the Registrant's 1996 Annual Report to Shareholders for the year ended December 29, 1996 is herein incorporated by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Pages 5 through 8 of the Registrant's 1996 Annual Report to Shareholders for the year ended December 29, 1996 under the caption "Management's Discussion and Analysis" are herein incorporated by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
As set forth in the Registrant's 1996 Annual Report to Shareholders for the year ended December 29, 1996, the following are incorporated herein by reference:
Item 9.
Item 9. Changes in and Disagreements With Independent Auditors on Accounting and Financial Disclosure
No reportable items.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Pages 2 through 5 under the caption "Election of Directors" of the Registrant's Proxy Statement dated March 11, 1997 filed with the Commission pursuant to Rule 14a-6(b) are incorporated herein by reference.
Pursuant to General Instruction G(3), information concerning Executive Officers of the Registrant is included in Part I, Item 4, under the caption "Executive Officers of the Registrant" of this Form 10-K.
Item 11.
Item 11. Executive Compensation
Reference is made to the information on pages 8 through 17 of the Registrant's Proxy Statement dated March 11, 1997 filed with the Commission pursuant to Rule 14a-6(b), concerning executive compensation, which is herein incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information on pages 6 and 7 of the Registrant's Proxy Statement dated March 11, 1997 filed with the Commission pursuant to Rule 14a-6(b), concerning the beneficial ownership of Registrant's common stock, which is herein incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Reference is made to the information on page 19 of the Registrant's Proxy Statement dated March 11, 1997 filed with the Commission pursuant to Rule 14a-6(b), concerning certain relationships and related transactions, which is herein incorporated by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) Documents filed as a part of this report.
1. Financial Statements
Reference is made to Part II, Item 8, captioned "Financial Statements and Supplementary Data" (and accompanying index) which have been incorporated by reference from the Registrant's 1996 Annual Report to Shareholders for the year ended December 29, 1996.
2. Financial Statement Schedule
Independent Auditors' Report ............................. 20
Schedule
II. Valuation and Qualifying Accounts and Reserves ...... 21
All other schedules are not applicable and have been omitted.
3. Exhibits and Index to Exhibits
Exhibits filed with this Form 10-K:
3. Exhibits and Index to Exhibits (continued):
Exhibits filed with this Form 10-K (continued):
Exhibits incorporated herein by reference:
3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
3. Exhibits and Index to Exhibits (continued):
Exhibits incorporated herein by reference (continued):
(b) Reports on Form 8-K
There were no reports on Form 8-K during the fiscal year ended December 29, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SERVICE MERCHANDISE COMPANY, INC.
By: /s/ S. Cusano ------------------------- S. Cusano Vice President and Chief Financial Officer
March 18, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Raymond Zimmerman /s/ Gary M. Witkin - ------------------------------- ---------------------------------- Raymond Zimmerman Gary M. Witkin Chairman of the Board, Chief President, Chief Operating Officer Executive Officer and Director and Director (Principal Executive Officer) (Principal Operating Officer) March 18, 1997 March 18, 1997
/s/ Harold Roitenberg /s/ S. Cusano - --------------------- ----------------------------------------------------- Harold Roitenberg S. Cusano, Vice President and Chief Financial Officer Director (Principal Financial Officer) March 18, 1997 (Principal Accounting Officer) March 18, 1997
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders Service Merchandise Company, Inc. Nashville, Tennessee
We have audited the consolidated financial statements of Service Merchandise Company, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995, and for each of the three years in the period ended December 29, 1996, and have issued our report thereon dated January 28, 1997; such financial statements and report are included in your 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Service Merchandise Company, Inc., listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP - -------------------------- DELOITTE & TOUCHE LLP
Nashville, Tennessee January 28, 1997
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
(A) The amounts represent transactions for Accounts Receivable Allowance for Doubtful Accounts.
(B) The Allowance for Doubtful Accounts was reduced for accounts written-off against the reserve.