Catherines Stores Corporation

3742 Lamar Avenue
Memphis, Tennessee 38118
U.S.A.
(901) 363-3900
Fax: (901) 794-9726

Public Company
Incorporated: 1987 as Catherines Holding Corporation
Employees: 2,200
Sales: $256.43 million
Stock Exchanges: NASDAQ
SICs: 5621 Women’s Clothing Stores; 6719 Holding Companies, Not Elsewhere Classified

Catherines Stores Corporation is a leading specialty retailer of women’s large-size clothing and accessories. The holding company operates through four separate retail divisions: Catherine’s; PS … Plus Sizes, Plus Savings; Added Dimensions; and The Answer. Each division’s chain of stores has a distinct merchandise format and marketing strategy. At the end of October 1995, the company operated 443 stores in 40 states and the District of Columbia.

The oldest and largest of the divisions, Catherine’s, was started in Memphis in 1960 when Catherine Weaver sold her Catherine’s Stout Shop to Ralph Levy. Levy soon closed his own family business, Ralph Levy and Associates, and concentrated on growing the Catherine’s company. Over the next 17 years Levy opened an average of 4.5 stores a year, in mediumsized cities, primarily in the Southeast, Southwest, and Midwest. The stores offered lower middle to middle income customers a broad assortment of moderately-priced apparel ranging from business suits to sportswear.

In 1977 Levy sold his 78-store chain to Garfinckel, Brooks Brothers, Miller & Rhodes, Inc. Garfinckel’s continued to open new Catherine’s stores, and in 1980, created the Plus Sizes division of Catherine’s. The new division focused on major metropolitan areas such as Chicago, Washington, D.C., Dallas, and Los Angeles. It offered budget- to moderate-priced merchandise to the same customer group served by Catherines.

Just as the new division got underway, Garfinckel’s was bought out by Allied Stores Corporation in an unexpected takeover bid. Initially, Garfinckel’s had been negotiating with Allied to sell its 22 Miller & Rhoads department stores. Then Allied made a bid for the entire 272-store chain and purchased it, in August 1981, for an estimated $228 million.

For the next five years, Allied supported the expansion of both Catherine’s and Plus Sizes. Then, in 1986, Allied in turn was bought by Canada’s Campeau Corporation.

In October 1987, Catherine’s management, along with affiliates of Investcorp S.A. (a Bahrain-based investment bank) and Citicorp Venture Capital, acquired the Catherine’s division from Allied Stores for $42.3 million as part of Allied’s divestitures, and formed Catherines Holding Corporation.

Bernard J. Wein, who had been with Catherine’s and Allied, was named chairperson, president, and CEO of the holding company as well as of Catherine’s. Stanley H. Grossman, formerly general manager of the Plus Sizes division, became executive vicepresident of the company and executive vice-president and general manager of Plus Sizes. In 1989, the company was recapitalized with an additional $3.9 million in equity and Investcorp acquired controlling interest.

Investcorp, short for Arabian Investment Banking Corp., was a major conduit for Arab investment in the United States and Europe. Chase Manhattan banker Nemir A. Kirdar, an Iraqi national with an master of business administration from Fordham University, founded the investment bank in 1982. Investors in the firm included members of the Saudi royal family and wealthy Middle Eastern businessmen. As Kirdar told Forbes in a 1987 interview, “We wanted to be a bridge between Middle Eastern investors and those companies in the West that needed new capital.”

The firm’s philosophy was to make large, friendly investments to finance the buyouts of old-line companies with brandname products and market share. Unlike other leveraged buyout firms, Investcorp did not rely on debt to finance its purchases. Instead, it put its own equity capital into those companies and generally left the running of the companies to the management. “We are owners, not managers,” a top official told Time.

Investcorp’s first big deal was buying Tiffany & Co. in 1984 and taking it public in 1987 at a profit of more than $100 million. Within ten years, the firm had put together a huge retail empire. Holdings in the U.S. included Saks Fifth Avenue, Color Tile (a carpet and tile chain), Circle K (convenience stores), Carvel (ice cream chain), and Camelot Music. Other than Tiffany’s, Investcorp had taken just two other units public by 1994: the Sports & Recreation Inc. chain and Catherines.

In 1991, Investcorp changed the name of Catherines Holding Corporation to Catherines Stores Corporation and took the company public for $8 a share. At the time, Catherines Stores operated 217 stores in 35 states, a 278 percent increase in stores since its purchase by Garfinckel’s.

The company’s growth reflected a significant change in the demand for clothing for larger-sized women. Between 1982 and 1992, sales of large-size apparel increased from $6 billion to $10 billion. Name-brand designers recognized the trend and responded accordingly. Liz Claiborne introduced Elizabeth, designed specifically for larger women. Harve Benard’s Pour La Femme line offered chic designs with elastic waistbands. Designers’ high-priced, large-size items accounted for $2 billion in sales during 1991 alone. Ellen Tracy, Evan Picone, and Jones New York also began offering bigger sizes, as did hosiery and lingerie manufacturers.

With more to offer this market than muumuus and polyester dresses, up-scale retailers began courting big women. Saks Fifth Avenue opened its Salon Z, a 6,000 square foot boutique for women size 14W and above; Bloomingdale’s expanded the footage of its Shop for Women.

In the discount and off-price retail area, designers and retailers also began providing styles that paralleled regular-size fashions. Dress Barn, an off-price chain, opened more than 100 Dress Barn for Women stores in five years. Leslie Fay began manufacturing a plus-size category of dresses and sportswear for Wal-Mart, Kmart, and other mass merchandisers.

Retailers and designers were addressing a long-neglected but growing market, which by 1993 was worth $13.6 billion. Analysts that year estimated that more than 20 million American women wore large sizes. Among women over the age of 40, some 40 percent wore a size 14, 16, or 18. “Unfortunately, as you get older, you also tend to get heavier,” Paine Webber analyst Anita Wager told Money magazine. And the market continued to grow as women in the baby boom generation aged. Analysts predicted that between 1990 and 2000, the number of women ages 45 to 55 would increase by 35 percent.

When Catherines Stores went public, the company was still organized into two divisions—Catherine’s and PS … Plus Sizes, Plus Savings—as it had been when part of Garfinckel’s. The company also still competed in three price ranges: main floor (budget), moderate, and better. Both divisions carried a large selection of apparel in the moderate and lower moderate price range. Catherine’s, located in medium-size and small cities, emphasized moderately priced clothes and offered some higher priced goods. Its prices were generally competitive with department stores and other specialty stores offering similar merchandise.

PS … Plus Sizes, Plus Savings, with stores in major cities, concentrated on the more budget-conscious customer, with dresses, sportswear, and other apparel priced in the lower moderate and main floor range. Its prices were generally ten to 20 percent below those of its department and specialty store competitors.

Most of the company’s merchandise consisted of brand name product lines, including Top Notch, Donkenny (DKGold), Koret, Baron-Abramson, Young Stuff, Cimy, Sharon Anthony, Damon, Chez of California, and Katherine Lindsay. Between 15 and 20 percent of this merchandise was made exclusively for Catherines Stores. The company also carried private label goods, in categories such as sweaters, blouses, shirts, coats, suits, activewear, and hosiery.

Catherines Stores grew much faster than originally anticipated. The 1991 stock prospectus announced plans to add 120 new stores by 1995, which would have brought the number to 337 units. By the end of the company’s 1994 fiscal year, the actual number of stores was 404.

Catherines Stores’ expansion strategy focused on adding new stores in communities in which it already operated and moving into selected geographical areas adjoining existing markets. Expansion was assisted by the purchase of existing companies. In 1992, the year after it went public, Catherines Stores gained more than additional stores when it bought the 108-unit Virginia Specialty Stores, Inc. for a total of $24.4 million. The two Virginia divisions, Added Dimensions and The Answer, gave Catherines Stores access to a more upscale, career-oriented segment of the large-size market. Virginia Specialty operated as a wholly owned subsidiary until 1995 when it was merged with Catherine’s. In 1993, the company acquired 14 stores from direct competitors (Cramer’s Half-Size Shops and Siefert’s Plus), expanding its presence in the Northeast. That same year, Catherines Stores, which until then had been leasing facilities, bought land in Memphis and built a new corporate office and a distribution center with the capacity to serve up to 1,000 stores.

The company opened stores primarily in strip shopping centers, believing its customers preferred the convenience of being able to park directly outside the store. By 1995, 78 percent of the stores in the four chains were located in strip centers. Such locations were also less expensive than mall stores. The stores themselves tended to be small, averaging between 3,000 and 4,500 gross square feet.

During 1995, the company planned to open 40 new stores, and had 39 of these operating by November of that year. The new stores included the company’s entry into Washington State (in Seattle and Olympia), Oregon, and North Dakota. The November total brought the number of stores to 443 in 40 states and the District of Columbia. Geographically, the company’s stores were concentrated in the South (50 percent) and Midwest (30 percent).

The company employed multiple merchandise concepts to serve the broadest segment of the market. The Catherine’s division (198 stores in 1995) concentrated its stores in medium-size cities, including Memphis, Atlanta, Tampa, and Indianapolis. Under the slogan, “Fashion independence for today’s large size women,” it provided lower middle to middle income women with full service and clothes at regular prices. Its moderately priced merchandise offered broad assortments of career and casual clothes, especially in the sportswear category. Approximately two-thirds of the items were brand name merchandise, with one-third of the remaining private label component designed and sourced directly by the company. By 1995, supersized merchandise represented one-third of the dollar sales in this division, with size 34 apparel being offered. Catherine’s represented 45 percent of the company’s stores.

The PS … Plus Sizes, Plus Savings division (112 stores) offered similar merchandise at budget-to-moderate prices to this same demographic group in major metropolitan areas. It carried both career and casual apparel, with more emphasis on the latter. The percentage of brand-name clothes was slightly higher than Catherine’s with narrower assortments. The prices at Plus Sizes were typically ten to 25 percent below those of department store competitors. Plus Sizes represented 25 percent of the company’s stores, and operated in cities such as Chicago, Washington, D.C., Dallas, and Los Angeles.

Added Dimension (99 stores) targeted a slightly more upscale customer in medium-size cities. The Added Dimension concept (“Beautiful fashions in sizes 16W to 28W”) emphasized career merchandise at moderate and upper moderate prices using many of its own private label brands. Growth centered on cities with successful Catherine’s locations. As with the Catherine’s concept, Added Dimension stores were fullservice, regular price formats. Twenty-two percent of the company’s stores were Added Dimension.

The Answer, the smallest division, focused on the urban off-price market (“Large sizes for less”). This concept targeted the slightly more upscale woman in major cities who wanted quality and fashion but was most concerned about value. It offered moderate to better-priced career-oriented merchandise at 20 percent below competitive prices. Eight percent of the stores (34) used this concept.

According to J.C. Bradford & Co., Catherines Stores corporate structure focused on controlled, efficient store expansion and operation. Two examples show how the company used that focus to reduce costs and please customers. First, the company used direct mail as its primary advertising approach. After the merger with Virginia Specialty, the company wanted to improve its management information system to provide updated background and purchasing information about its customers. The STS Customer Profile System information database software it installed led the company to refine its direct-mailing campaigns. Before the new system, each mailer generated $3.67 in sales. After using the software to narrow the scope and tastes of its customer base, sales per mailer jumped 67 percent in 1993 to $6.13. The ability to narrowly categorize the customer base also helped Catherines Stores reduce advertising expenses by $58,000 in one year, according to David C. Forell, executive vice-president and chief financial officer.

Second, concern about the customer as well as the bottom line was also evident in Catherines Stores’ handling of its check recovery effort. With about 30 percent of its business done in checks, the company wanted both to collect the funds and keep the customer. It had been dealing with returned checks internally, sending a letter and making a phone call before turning the check over to a collection agency. In 1992, Catherines Stores signed on with a start-up company called Revenue Assurance Professionals in Memphis. Their ProCheck system operated under the assumption that if customers were treated with respect and dignity, they would not only redeem their returned check and pay an appropriate returned check fee, they would also continue to shop with the company. The company’s success rate of collection efforts improved 25 percent.

With regard to staff, turnover at the store and district manager level was well below the industry average. And J.C. Bradford & Co. reported the company had a history of treating employees well, particularly regarding family leave issues. In 1992, shareholders approved an employee stock purchase plan, allowing full-time employees with at least one year of service to contribute from one to ten percent of their pay towards the purchase of the company’s common stock.

With sales below expectations in 1994, the company focused on controlling and reducing expenses wherever possible. For example, it reduced training costs by using video tapes during the in-store training of its associates and reduced franchise taxes by reincorporating the company from Delaware to Tennessee. They also began experimenting with a program to take mail and phone orders and tested two frequent shopper programs. One program, which gave discounts as rewards whenever a customer shopped at the store, resulted in more frequent store visits with higher average sales. In the second program, a customer buying a frequent shopper card received a ten percent discount on all purchases for 12 months. Over 20,000 such cards were sold in August 1995 at $25 apiece, yielding half a million dollars.

In 1995, the company introduced a narrow assortment of shoes in hard-to-find sizes in 40 stores and planned to add shoes in another 40 locations if the pilot tests proved successful. Additionally, large-size petite departments, offering clothes for women under 5’4”, were opened in nearly half the stores.

Catherines Stores competed primarily with department stores, specialty retailers, discount stores, and mail order companies. During the mid-1990s, the large-size market saw a rapid consolidation of specialty stores. Audrey Jones went out of business, as did Conston Corp. Other competitors, such as Women’s World, closed stores. This resulted in a thinning out of Catherines Stores’ competition. Despite a continuing softness in women’s retail apparel overall and a rough 1994, the company’s earnings were up in 1995 and expansion plans were on target. Analysts at both J.C. Bradford & Co. and Morgan Keegan gave the company a buy rating, indicating it appeared well positioned to take advantage of the reduced competition and the anticipated increase of its target population.

Principal Subsidiaries

Catherine’s, Inc.; Catherine’s Partners, L.P.; Catherine’s of California, Inc.; Catherine’s of Pennsylvania, Inc.

Catherines Stores Corporation

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Catherines Stores Corporation

3742 Lamar Avenue
Memphis, Tennessee 38118
U.S.A.
(901) 363-3900
Fax: (901) 794-9726

For the next five years, Allied supported the expansion of both Catherine’s and Plus Sizes. Then, in 1986, Allied in turn was bought by Canada’s Campeau Corporation.