Mazel Stores, Inc.

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Mazel Stores, Inc.

31000 Aurora Road
Solon, Ohio 44139
U.S.A.
(440) 248-5200
Fax: (440) 349-4056
Web site: http://www.mazelstores.com

Public Company
Incorporated: 1975 as The Mazel Company
Employees: 1,181
Sales: $237.1 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: MAZL
NAIC: 45299 All Other General Merchandise Stores; 42199 Other Miscellaneous Durable Goods Wholesalers; 42299 Other Miscellaneous Nondurable Goods Wholesalers

Mazel Stores, Inc. is a retailer and wholesaler of consumer closeout items. Its wholesale operation, which is the largest for closeout merchandise in the United States, buys in bulk from manufacturers, wholesalers, and retailers who have overstocked, discontinued product lines, or are liquidating their assets. From its headquarters and distribution facility in Solon, Ohio, Mazel buys merchandise from more than 700 suppliers throughout the world at costs considerably lower than traditional wholesale prices. The company then resells this merchandise to more than 2,000 wholesale customers, including major regional and national retailers, as well as smaller retailers, manufacturers, wholesalers, and distributors.

The company also markets merchandise through its own chain of retail stores, which operate under the names “Odd Job” and “Odd Job Trading.” There are more than 45 of these stores located in New York, New Jersey, Connecticut, and Pennsylvania. They offer brand-name closeout merchandise—which includes housewares, stationery, books, party goods, health and beauty aids, food, toys, hardware, electronics, and garden supplies—at prices substantially below traditional retail.

Wholesale Beginnings in 1975

Mazel Stores, Inc. began as The Mazel Company in 1975. Founded by entrepreneurs Reuven Dessler, Jacob Koval, and a number of other investors, the operation was at that time strictly wholesale. With an eye for “deals,” Dessler and Koval capitalized on the potential closeout bargains inherent in supplier overruns, overstocks, and bankruptcies. By making rapid purchasing decisions, purchasing vendors’ entire product offerings, and taking possession of merchandise more quickly than many of its competitors, Mazel essentially made things easier for vendors and minimized disruption to their business caused by excess stock. Soon, the company had established relationships with several key vendors who offered their closeout merchandise to Mazel first.

After more than five years’ wholesale success, Dessler and Koval attempted to implement the complementary wholesale/retail structure that was to characterize the Mazel Stores of the 1990s. In 1981 the company initiated “Just Closeouts,” a chain of retail outlets in Ohio.

After a brief period of success, however, Just Closeouts did not prove profitable. In 1993 the business faltered and never recovered, losing a total of $2.2 million for the company by October of 1995. That year, Mazel shed the loss-making 11 stores for approximately $1.8 million in cash and a contingent note for up to $500,000, realizing a $1.6 million loss on the divestiture.

The early 1990s also marked changes in the ownership structure for The Mazel Company. A new corporate entity, Mazel Company L.P., was formed by Dessler, Koval, and a group of investors in a private investment fund. Mazel Company L.P. acquired The Mazel Company and Just Closeouts in a recapitalization transaction. The new company was capitalized with $13.5 million of equity: $9 million contributed by the private investment fund and $4.5 million contributed by Dessler and Koval. Under the new arrangement, Dessler continued to serve as the company’s president and Koval acted as its vice-president.

Mid-1990s: Retail Revisited

In 1995 Mazel hired two key members of its management team. Brady Churches, named president of retail operations on August 14, 1995, had served previously in various managerial positions for Consolidated Stores Corporation, another national retailer and wholesaler of closeout merchandise. During Churches’s time at Consolidated, the company had grown from one store to approximately 800. Mazel’s second new leader—Jerry Sommers, who was brought in as executive vice-president of retail—was also a veteran of Consolidated Stores.

With its new management team in place, Mazel was ready to try its hand at retail again. In late 1995, through a complicated reshuffling of corporate interests, Mazel’s main investor, ZS Fund, acquired all the stock and equity interests of one of the company’s key customers—Odd Job Trading Corp. Odd Job, which consisted of 12 retail stores and a warehouse and distribution facility, was owned by its co-founders, Howard Snyder and Israel Horowitz, and the Mazel Stores’ corporate predecessor, The Mazel Company. The Odd Job stores, most of which had opened in the late 1980s and early 1990s, were located in New York and New Jersey.

At the end of fiscal 1995, Mazel’s wholesale operations had grown to $77.3 million—a 6.9 percent annual growth rate over the previous five years. This wholesale income made up 77 percent of Mazel’s total sales, with retail sales making up the remainder.

1996: Restructuring and IPO

In March of 1996 two more New York retail stores were added to the Odd Job collection. Formerly operated under the name “The CloseOut Store,” these outlets were purchased from Melen Trading Corp., an entity partially owned by Snyder, Horowitz, and the owners of the then-defunct The Mazel Company. The absorption of these two stores gave ZS Fund 14 retail outlets in all. The company also implemented a new merchandising approach. By increasing the number of brand-name products offered, Mazel targeted brand-loyal customers in hopes that they would shop Odd Job for their desired products before shopping traditional retail. In concurrence with the new merchandising approach, Mazel launched a marketing campaign that promoted its brand-name products.

By the end of the year, Mazel was operating 23 stores, which ranged in size from 6,500 to 25,000 square feet. To support this current growth and planned future expansion, the company increased the size of its Englewood, New Jersey warehouse from 140,000 to 253,000 square feet and broke ground on a 100,000-square-foot addition to its Solon, Ohio facility.

The fall of 1996 marked a number of major changes for Mazel. In preparation for a planned initial public offering (IPO), the company underwent yet another reshuffling. Mazel Company L.P. acquired the Odd Jobs holdings from ZS Fund for $1.4 million. Mazel Stores, Inc., a new entity, was then formed as a wholly owned subsidiary of Mazel Company L.P.—and all of Mazel Company L.P.’s assets were transferred to Mazel Stores, Inc. Although Mazel Stores’ ownership was essentially identical to that of Mazel Company L.P., the restructuring was accompanied by changes in management. Formerly president and vice-president, Dessler and Koval assumed the positions of chairman of the board/CEO and executive vice-president of wholesale operations, respectively. Brady Churches stepped into the role of company president, and Jerry Sommers assumed a director’s position, with responsibility for all retail division purchasing.

Restructured and poised for growth, the company made an initial public offering of 2,574,000 shares in November 1996. With shares priced at $16.00, Mazel netted approximately $37.3 million after expenses—leaving it debt-free and ready to move forward. Year-end 1996 sales for Mazel were $179.8 million. The shift to a retail focus was evident in the 1996 financials. Retail operations generated 47 percent of the year’s total income, whereas in 1995 retail accounted for only 23 percent of the total.

1997-1998: Building the Retail Base

Rapid retail expansion was the theme for 1997. The company’s goal was to open nine new Odd Job stores by fiscal year-end; management wasted no time in working toward that goal. By the end of its first fiscal quarter, in April, the company had signed leases for five new store locations: two in New York, two in New Jersey, and one in Connecticut, a new territory for Odd Job. Perhaps more significant, on April 25 Mazel announced its first strategic partnership—with Value City Department Stores, a 95-store chain with locations in the Midwest and East. Under the terms of the joint venture, Mazel agreed to acquire and operate the toy and sporting goods and health and beauty aids departments in 90 of the Value City stores.

At the midpoint of Mazel’s fiscal year, three new Odd Job stores were operating and leases had been signed for four more locations. The company also had assumed operational control of the identified departments for Value City stores. Bringing to bear its expertise in the closeout market, Mazel altered the merchandise mix in these departments to include approximately 70 percent closeout products. Historically, Value City had carried approximately only 20 percent closeout merchandise.

Company Perspectives:

Already the largest wholesaler of closeout merchandise in the United States, our goal is to establish the retail side of our business, Odd Job, as the leading closeout retailer in the Northeast and Mid-Atlantic markets. The key to our success —we buy quality, brand-name merchandise at substantial discounts and sell these goods far below the original retail price, bringing exceptional value to our customers.

Just before Thanksgiving 1997, the company met its goal of opening nine new stores. Extended lease negotiations delayed the scheduled openings for four of the stores, however, resulting in loss of potential revenues, higher inventory costs, and lower retail profits. In addition, the Value City joint venture got off to a slower start than the company had anticipated. These setbacks, and their associated losses, created a slight dip in financial results. Third quarter net income was $1.6 million, compared with $2.1 million for the previous year’s third quarter, and Mazel’s stock dropped to $11 per share in November, from a 52-week high of more than $29 the previous month.

Mazel regained momentum during the fourth quarter of 1997, closing the year with sales of $208.3 million, a 16 percent increase over 1996. The expansion of the retail base again was reflected in the proportions of the retail and wholesale income streams for the year. Retail operations brought in 54 percent of the total sales, while wholesale operations accounted for 46 percent—an almost perfect reversal of the previous year’s proportions.

The company’s shift in orientation from wholesale to retail continued to play out through 1998. Seven new stores were opened by the end of the first fiscal quarter. An additional four stores opened in the second quarter brought the total store count up to 43 by midyear 1998. Retail at that point accounted for 65 percent of total sales mix.

Although Mazel’s retail sales grew during this time frame, its wholesale dropped off slightly because of the loss of its largest customer, MacFrugal’s Bargains Close-Outs Inc. Mac-Frugal’s, which was bought by a competitor late in 1997, had contributed approximately 30 percent of Mazel’s 1997 wholesale revenues. In the company’s 1998 second quarter report, Dessler wrote, “Our wholesale operation remains focused on making new inroads. We have worked hard to develop other sales opportunities and are very encouraged by sales to non-traditional closeout businesses.”

In the fall of 1998 Mazel relocated its Englewood, New Jersey, warehouse to a larger, 350,000-square-foot facility in South Plainfield, New Jersey, in preparation for further expansion. The company also added a new executive vice-president and general manager—Thomas Kiley, previously affiliated with discount retailing operations McCrory Corporation and Jamesway Corporation.

Mazel had opened 15 new stores by October 31, 1998, bringing the total to 47. This growth resulted in record sales of $60.3 million for the third quarter—an increase of 23 percent over the previous year’s third quarter. Retail, which accounted for 60 percent of the total sales, grew by 39 percent. In addition, the wholesale division rebounded from its shaky second quarter, growing by almost six percent as new customers and increased sales to existing customers made up for the loss of MacFrugal’s. The warehouse relocation, however, took its toll on the company’s bottom line. Net income for the first nine months of 1998 was $1.8 million—down substantially from 1997’s nine-month net of $5.1 million. In a November 1998 press release, Dessler stated, “We have accomplished many of our strategic infrastructure goals for 1998 and are well positioned for the holiday season. While these projects have adversely impacted our near term financial results, we remain focused on long-term growth for our shareholders.”

In the final quarter of 1998 wholesale proceeds again took a hit, dropping 27 percent. Retail revenue, however, grew by 32 percent. The resulting net sales were $74.6 million—11 percent higher than in the fourth quarter of 1997. The year-end sales total for Mazel was $237.1 million, compared with $208.3 million for fiscal 1997. The retail division accounted for 66 percent of the year’s total sales.

Staying the Course for the Future

Since the acquisition of the Odd Job chain in 1995, Mazel has remained true to its vision of becoming the leading closeout retailer in the Northeast and Mid-Atlantic regions. With plans to open 17 new stores in 1999, the company expected to exceed its goal of having 60 stores by the year 2000. “Our growth vehicle continues to be the expansion of our Odd Job retail operation,” said Dessler in a March 1999 press release. This projected growth was expected to result in retail sales accounting for an increasingly large share of total sales. As such, future earnings were likely to become more seasonal—with holiday sales in the second half of the year providing the bulk of the full year’s revenues.

In an effort to bolster sagging wholesale revenues, in 1999 Mazel entered into an agreement with Value America, an online retailer of consumer products, technology, and office supplies. Under the agreement, Mazel would serve as a closeout product source, with associated customer fulfillment services in Value America’s e-commerce operation. The company also planned to explore other e-commerce sales opportunities for its wholesale division.