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FRIEDMAN’S PLANS TO EXPAND CHAIN TO 3,000 STORES IN STRIP CENTER PUSH

By Glen A. Beres

Even though Friedman’s has temporarily put the brakes on its rapid expansion in favor of building profits, the Savannah, Ga.-based jewelry chain is clearly a company with growth on its mind. Friedman’s believes that its “power strip center” strategy gives it the potential to become a 3,000-store national chain.

After opening about 85 new units per year for much of the 1990s, the retailer added only 24 units and closed 34 underperforming ones in 2001. This year’s plans, meanwhile, call for only 36 new store openings when its current fiscal year ends this month. Friedman’s has said that it will also limit store growth in 2003. The company now operates 650 stores.

At first glance, that might look curious for a company with such big ambitions to grow. But company officials have stressed that this is the time to shift the focus from store growth to profit growth.

“Over the last nine years, our focus was on brand building,” CEO Bradley J. Stinn said at an analyst presentation this year in New York City. “We introduced our value-leader positioning, pioneered the power strip center real estate strategy, expanded rapidly and built a highly capable management team. Today we’re in a different phase of the company. It’s imperative for us to slow unit growth to drive the business to its potential profit base.”

Friedman’s was one of the fastest-growing jewelry chains in the second half of the 1990s, going from 55 stores in 1992.

Said CFO Victor Suglia at the presentation, “Some of the benefits of slower growth include the maturation of our store base and organization, an increase in average store sales due to a lack of dilution from growth, improvement in credit productivity, the reduction of lower-yielding assets and related earnings drag, and enhanced operating predictability.”

But the company still plans to open units over the next few years and is keeping its eye on the ultimate prize: a national brand name, à la competitors Zales and Kay. And the retailer believes its unique power strip center strategy can get it there. Two-thirds of its stores are located in strip centers, the vast majority of which are anchored by a Wal-Mart. Other frequent power strip co-tenants include Cato Fashion, Charming Shoppes, Dollar Tree, J.C. Penney and Payless Shoe Source.

Friedman’s is the only major jewelry chain pursuing this strategy. According to Stinn, the advantages of strip centers include close proximity to discount stores, which drives traffic, low operating costs and superior margins and financial returns.

“We’re happy to piggyback onto Wal-Mart,” he said. “This is a high-return, low-risk store model.”

The other third of the retailer’s stores are in regional malls. But though Stinn called these units “profitable assets achieving excellent returns” and referred to the regional mall strategy as “creating a brand umbrella” for Friedman’s, he said there are fewer new store opportunities on the mall side. Meanwhile, there are still some 1,700 Wal-Marts in the chain’s 20-state radius that do not have a Friedman’s in their strip center, plus an additional 900-plus outside its existing markets. By continuing to team up with Wal-Mart, Friedman’s believes it can easily surpass 3,000 stores.

The Wal-Marts within the company’s market range are of particular interest. Friedman’s has adhered to a philosophy of dominance through density — that is, it believes it benefits more from its strong brand name, its economies of scale in terms of operations, management, advertising and marketing, and a high rate of return when it “backfills” stores in markets where it already has a strong presence, rather than opening units in totally new areas.

Another major avenue of potential growth for Friedman’s is Crescent Jewelers. This Oakland, Calif.-based chain of 154 stores in seven Western states is an affiliate of Friedman’s. The two companies share the same ownership and some of the same officers, including Stinn and Suglia, and they are also tied together financially through Crescent loans and warrants that Friedman’s holds. Friedman’s also provides Crescent with accounting services, information technology support and back-office processing functions in a fee-for-service arrangement.

Although Crescent has struggled financially for much of the past 10 years, it appears to have turned the corner, posting positive results recently. Friedman’s officials have repeatedly said that they would like to acquire Crescent as soon as possible to give Friedman’s a truly national presence.

One side effect of Friedman’s historically aggressive growth is that it now has a relatively young store base that needs time to build up sales and profitability per store, and the slowdown in new units will allow that. According to Suglia, power strip stores require an initial investment of approximately $262,500. First-year sales are about $500,000, growing to $750,000 in the fifth year. Meanwhile, operating income over the first five years increases from $80,000 to $165,000, and the return on investment, or ROI, jumps from 30 percent to 55 percent.

Mall stores, Suglia said, require an initial $415,000 investment. Sales typically increase from $750,000 the first year to $1.1 million by the fifth. Operating income doubles from $110,000 to $220,000 and ROI improves from 26 percent to 45 percent.

Friedman’s has also watched its proprietary credit card sales drop to 52.8 percent of sales in fiscal 2001, from 56.9 percent. Suglia expects the company’s renewed emphasis on strengthening its financial position to return credit card sales to their previous levels.

One area that has seen constant improvement is the chain’s bad-debt level. From 1997 through 2001, 90-day-plus delinquencies decreased from 7.7 percent to 5 percent.

In detailing the company’s financial growth over the past five years, officials say the numbers reveal why Friedman’s has decided to slow store growth over the next few years to focus on profitability. Between 1996 and 2001, sales at Friedman’s more than doubled from $173.7 million to $395.2 million. That was achieved through a phenomenal expansion that saw the retailer grow from 301 stores to 645 for the period. Between 1996 and 2000, pretax earnings grew by 9.5 percent. In 2001, however, pretax earnings dropped by more than 43 percent from 2000 levels — reflecting the weakened economy.

Likewise, earnings per share skyrocketed from 1998 through 2000 (from 72 cents to $1.36 per share), but dropped by more than 38 percent in 2001.

Besides slowing its unit growth and shutting unproductive stores, the company has reached an “advertising critical mass” in the majority of its current markets. This, too, has led the company to rethink an aggressive expansion strategy and focus instead on profits and efficiency, Suglia said.

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