Paul Harris Stores, Inc.

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Paul Harris Stores, Inc.

6003 Guion Rd.
Indianapolis, Indiana 46254
U.S.A.
(317) 293-3900
Fax: (317) 298-6940
Web site: http://www.paulharrisstores.com

Public Company
Incorporated: 1952
Employees: 2,200
Sales: $167.5 million
Stock Exchanges: NASDAQ
SICs: 5621 Women’s Clothing Stores

Paul Harris Stores, Inc. was incorporated on April 8, 1952. The company’s cofounders, Gerald Paul and Earl Harris, began the operation by selling prepackaged apparel in supermarkets under the name Packaged Apparel. In 1954 Gerald Paul, age 30, and Earl Harris, age 37, established the company’s first store in a strip mall on U.S. 40 in Plainfield, Indiana, just outside of Indianapolis. The store sold clothing for the whole family and featured late hours (open until nine) and air conditioning, unusual for the time. With a good location on the only east-west route into Indianapolis, the store did well and expanded in the same location, which was anchored by a supermarket and a drugstore. Soon a second location was opened, again in a strip mall with a drugstore and supermarket, in Indianapolis. Gradually the firm expanded to include more locations in Indiana, then it opened stores in adjacent states.

In the early 1960s the company decided to move from strip malls to covered shopping centers. Even though the strip mall stores were doing well, Paul and Harris felt that the future of retailing would be in the indoor shopping centers. Moving into covered malls meant higher rents, and the company had to become more focused. The transition included narrowing the store’s product line to women’s clothing only. The first Paul Harris Store located in a mall was in Akron, Ohio. The expansion was fueled by funds raised when the company went public in 1960. Its stores featured flashy displays that created a lot of attention and media coverage in leading trade publications. Later in the decade the company turned its old strip mall locations into Paul Harris Discount Stores, which later became Clothes Out Junction and eventually The $5-$10-$15-$20 Place.

In the 1970s Paul Harris Stores wanted to be known as a store for “young swingers.” They carried trendy styles of the day, from disco to psychedelic. Things were going well when disaster struck. On June 18, 1978, a tornado hit Indianapolis, smashing the company’s distribution center and shutting down the company’s headquarters. The company had to find temporary warehouses and replace all of its lost stock. It took about two years to fully settle with the company’s insurers. The storm caused a shortage of merchandise throughout the chain, and shelves and racks remained unreplenished for some time.

Offered Clothes for Working Women in the 1980s

The 1980s saw tastes in women’s clothing become more subdued. As more and more women went to work, Paul Harris moved toward clothes for working women, offering suits and dresses. In 1985 Earl Harris retired and established his own consulting business, leaving Gerald Paul in charge of the company.

As Paul Harris focused on working women, it found that it needed to address women’s needs for more casual wear. It started the casual line of Pasta brand clothing and displayed it in its own section within existing Paul Harris stores. Pasta offered “colorful, casual, comfortable street clothing.” Pasta caught on, and Paul Harris opened some freestanding Pasta stores in the mid-1980s. Eventually Pasta stores carried both Paul Harris and Pasta clothing.

The company was rapidly expanding. In 1986 it opened 68 stores. In 1987 it opened new discount stores under the name, The $5-$10-$15-$20 Place. These new format discount stores sold apparel priced at $5, $10, $15, or $20. While they carried some Paul Harris apparel, they also sold overruns and off-price merchandise from other retailers and manufacturers. Paul Harris first got into discount stores in the late 1960s. As the company moved from strip malls into regional malls it turned its old strip mall locations into Paul Harris Discount Stores, which later became Clothes Out Junction. Clothes Out Junction stores would be converted to the new $5-$20 format over the next few years. Overall earnings for 1987 were $4.74 million on sales of $190 million.

1988: A Bad Year for Specialty Stores

The year 1988 was the worst to date in the company’s history. It was also a bad year for many specialty retailers. Paul Harris reported a loss of $5.6 million for the year on sales of $195 million. The company’s earnings in the second half of the year were not enough to overcome losses in the first and second quarters. In 1987 and 1988 the company had adopted a sportier look, including miniskirts and other trendy items, that failed to score with Paul Harris’s career-oriented customer base. Consequently, Paul Harris was forced to heavily mark down its unsold trendy items.

Paul Harris rebounded in 1989 and reported a healthy profit of $1.9 million on sales of $235.9 million. The turnaround from losses in 1988 was attributed to a better balance between inventory and demand. The company was able to sell more merchandise closer to full price. Other improvements included a new point-of-sale terminal system that made it easier to track merchandise sales and consumer trends. The company also began experimenting with a new air-freight system to speed up deliveries from overseas. Gerald Paul became more involved with merchandising and purchasing, a function he had previously delegated with poor results.

In 1989 the company returned to its historically more traditional line of clothing aimed at working women. The company also made a point to differentiate its Paul Harris line from its Pasta fashion line, which was targeted to teens and young adults. The company was focusing on a strategy of increasing sales per square foot, part of which involved store closings. Less productive stores were closed, and new-store openings were scaled back.

1990: Good Start, Then Disaster

The year 1990 began as a high point for the company. There were 377 stores in 37 states, and sales volume was around $240 million. The company planned to open about 10 new stores and close the same number. Sales per square foot averaged around $200, while other highly successful specialty retailers such as The Limited and Limited Express averaged $400 or more per square foot. Based on its $1.9 million profit for 1989, the company was judged to have returned to profitability, although it posted a first quarter loss in 1990 of $371,000.

Then the stores had a crisis when business conditions turned sour. All the company’s stores had a terrible Christmas season, a time when retailers expected to do as much as 40 percent of their year’s business. It became clear that Paul Harris had expanded too quickly, opening 76 stores in one year. It also turned out that the change in focus on working women was made too abruptly, causing Paul to comment that the stores went from “too young and junior” to “too dull and classic.”

One problem was merchandising. For a long time, Gerald Paul had done the merchandising himself, putting together the product every season. As his duties as CEO became more demanding, he found he couldn’t handle merchandising, too. With nobody in the company to handle merchandising, he looked outside the company. Two outside merchandisers failed to satisfy Paul, and the third tried to change Paul Harris into an upscale retailer. When that failed, the company was forced into reorganization under the protection of U.S. bankruptcy laws in 1991.

For 1990, Paul Harris reported losses of $30.5 million for the fiscal year ending February 2, 1991. Losses in the fourth quarter alone were approximately $28.6 million. Sales for the year were $230.5 million, down 2.3 percent from 1989’s sales of $235.9 million.

Company Files for Bankruptcy in 1991

On February 27, 1991, Paul Harris filed for Chapter 11 protection in the U.S. Bankruptcy Court. The company cited problems in obtaining short-term financing, due primarily to its substantial losses in the fourth quarter of 1990. As a result, vendors stopped shipments to the company. Paul Harris listed liabilities of $54.3 million, including $50.6 million in unsecured claims, and assets of $91.4 million. Three banks agreed to provide $19 million in letter of credit financing to be used for the purchase of goods for operations while the company was in Chapter 11.

Company Perspectives:

Paul Harris is a unique specialty retailer of women’s clothing, selling the Paul Harris Design private label brand. We offer a distinctive color-coordinated selection of casual clothing and accent pieces, such as embroidered vests, and accessories to women whose wardrobe is an important part of her life. Our target customer is a woman who goes to Paul Harris to buy complete outfits and mix-and-match separates.

Our customer wants “current styles,” but she is not “trendy.” She demands comfortable, casual, color-related, versatile apparel that moves from work to casual activities simply by dressing it up or down. She demands easy wear and easy care (washable) merchandise like cotton knits, woven novelties and soft related separates. This customer wants to get the “most” from her fashion dollars and demands value.

Paul Harris meets the demands of this traditional, ‘middle American’ customer with sportswear separates and accessories specifically developed for her lifestyle and clothing needs.

In 1991 and 1992, Paul Harris closed 175 stores and kept 201 open. Its workforce was cut almost in half, to 2,600. For fiscal 1991 it reported losses of $22.4 million on sales of $197.2 million.

Emerges from Chapter 11 After 18 Months

On August 31, 1992, Paul Harris emerged from operating under Chapter 11 upon confirmation of its Second Amended Plan of Reorganization. The company’s liabilities were to be settled through a combination of initial and deferred cash payments plus the issuance of new stock and long-term notes. Unsecured creditors received 25 percent cash, a pro rata share of $24 million in notes, and 5.7 million shares in the reorganized company. After the stock distribution, unsecured creditors held 71 percent of the company’s common stock, with existing shareholders having 17 percent and management 11.5 percent. For the 26 weeks prior to August 2, operating under the protection of Chapter 11 the company had sales of $60.6 million, with net income of $6.8 million.

The reorganized Paul Harris offered moderately priced casual apparel that could be worn either at work or at play. It also explored alternatives to regional malls and worked out less costly formats for new stores. It was able to cut its $150,000 construction cost in half by trimming such elements as hardwood floors, paneled-wood treatments, and expensive paint and lighting. It began experimenting with locations in strip malls, opening two locations in the fall of 1992. Half of its 15 planned new stores for 1993 were slated for strip malls.

While in Chapter 11, additional research was undertaken to find out more about the company’s customer base. It set up toll-free numbers to allow shoppers to chat with Gerald Paul. Focus groups were set up. The results of its customer research told Paul Harris that its target customer was a working woman, aged 18 to 35, earning under $30,000 a year and living mainly in Midwestern and Southern suburbs. About half were married, usually with children, and the other half were single and tended to spend more on fashion. Gerald Paul told WWD that the most important finding from the company’s customer research was that women want “casual wear and what we call ‘versatile clothing’ that can go to work and also be used in off-hours.” That meant replacing navy suits with blazers and silk shirts.

The reorganized company also changed its merchandising approach. Previously, the company had two merchandising staffs, one for the career clothes offered by Paul Harris and one for the casual line marketed as Pasta. In 1992 the company merged the two divisions under one general merchandise manager, Eloise Paul, Gerald Paul’s daughter. She became the company’s senior vice president of merchandise.

The new merchandising program focused on providing deep selections of mix-and-match separates. Buying deep also gave Paul Harris more leverage to make deals on fabrics and manufacturing. Nearly all of the company’s Paul Harris and Pasta brand merchandise was private label, supplied by 15 to 20 key vendors. To improve its merchandise mix, the company set up test programs to test apparel for silhouette, color, and fabric. Six to 12 units of a style and color would be sent to designated test stores and prominently displayed, with feedback coming within three weeks.

Testing led to another change. The firm had previously relied on overseas manufacturers for about three-fourths of its goods. Since testing in-season required faster turnaround times, Paul Harris began to forge more ties with U.S. vendors, who now supplied more than half of the company’s merchandise.

As a result of these changes, the newly reorganized Paul Harris turned a profit for the last half of 1992. Sales for the last half of fiscal 1992 (26 weeks ending January 30, 1993) were $85 million, with net income of $5.7 million.

Fischer Joins Paul Harris in 1993

In August 1993 Charlotte Fischer was named to the company’s board of directors. She had been consulting for the firm since 1992 and was a major contributor to its reorganization. Her track record in retailing was remarkable. From 1986 to 1991 she was president and CEO of Claire’s Boutiques and a member of the board of its parent company, Claire’s Store Inc. While with Claire’s, she took the company from 300 stores and $74 million in sales to 1,100 stores with $257 million in sales in just five years. Then, she was abruptly fired from her position, reportedly because of a personality conflict with someone in the parent company’s management. In 1991 she started her own consulting firm, C.G.F. Inc. She was also briefly hired as CEO of failing Parklane Hosiery in early 1992, but couldn’t rescue the company from Chapter 11. Paul Harris reported that sales for fiscal 1993 were $154.3 million and net income was $5.8 million.

In April 1994 Charlotte Fischer was named CEO-designate to succeed Gerald Paul at the end of the fiscal year in January 1995, when Paul was to retire. In August the company introduced the Paul Harris private label credit card. By 1995, the card accounted for some 8 percent of the company’s sales. Transactions involving the card had an average of 91 percent more sales dollars than the company’s average sales dollars per transaction.

In October 1994 the company opened its first Paul Harris Direct at the Franklin Mills outlet mall outside Philadelphia, Pennsylvania. The Paul Harris Direct concept, which allowed the company to introduce its brand merchandise to people who liked to shop at outlet malls but visited malls less frequently, was expanded in 1995 and 1996. A second Paul Harris Direct was opened in April 1995 at the Horizon Outlet Center near Indianapolis, with favorable results.

In December Gerald Paul, 70, was named “CEO of the Year” by Indiana Business Magazine. Sales for the year were $167.8 million, with net income of $3.1 million. The company’s stock traded in the $2.50 to $7.25 range.

Charlotte Fischer became chairman, president, and CEO in 1995

As planned, Charlotte G. Fischer took over as CEO, chairman, and president upon the retirement of Gerald Paul at the end of January 1995. Paul remained on the board as chairman emeritus. Her first full year as chairman, president, and CEO of Paul Harris was a good one. The company enjoyed a strong Christmas and holiday season. Fourth quarter earnings were $4.2 million, up from 1994’s fourth quarter earnings of $4.1 million. Comparable store sales were down three percent, due mainly to bad weather in January 1996. Sales for the year were $167.5 million, with net income of $1.6 million. The company’s stock traded in the $1.06 to $3.13 range.

During 1995 the company closed 13 of the $5-$20 stores as part of its strategy to phase out the division. Another 15 stores were converted. The $5-$20 stores were fully phased out by September 1996, allowing the company to focus its resources on building the Paul Harris name and reputation for affordable, quality casual wear.

The company took significant steps in 1995 to improve the look of its stores and “allow prompt buying ideas by grouping merchandise together as outfits, and to ensure that our sales people provide friendly, knowledgeable buying and fashion assistance,” according to the company’s annual report. Plans were developed for 1996 for “customer friendly” upgrades, described in the company’s annual report as “spacious, well-lit dressing rooms with ample mirrors; seating areas with comfortable sofas and chairs; moveable racking systems that make it easier to rotate merchandise to offer our customers a ‘new look’ every few weeks; new lighting systems; improved general appearance; and expansion of our accessory area.”

New customer service programs introduced in 1995 included more training for retail associates, district managers, and store managers. New district managers began attending the Paul Harris University for four days of training, then they in turn trained and supervised store managers. The company also instituted a liberal “no questions asked” returns policy. A toll-free hotline was set up that allowed customers to leave personal messages for Fischer, who received an average of 75 calls per month.

In merchandising, new items were added to the mix, including denim pants, skirts, and jumpers, and popular lines such as vests and turtlenecks were expanded. Clear price points were established, and virtually all items in Paul Harris stores were priced under $59.

At the start of 1996 the company operated 235 stores in 26 states and the District of Columbia, with the heaviest concentration of stores in Indiana (44 stores), Ohio (32 stores), Illinois (27 stores), Pennsylvania (23 stores), and North Carolina (12 stores). Of the 235 stores, 217 were Paul Harris fashion division stores located principally in regional enclosed shopping malls. The remaining 18 stores were The $5-$10-$15-$20 Place division stores, most of which were located in strip shopping centers. The phase-out of the $5-$20 stores was completed in September 1996.

A prototype store was opened in April 1996 in Indianapolis. According to the company’s annual report, the prototype store “incorporated the ambiance and layout we believe most effectively appeals to our customers.” The store was to be used as a guidepost for developing new stores, with the help of ongoing customer surveys and focus groups.

By January 1997 the company’s stock was trading around the $20 per share range, due in part to strong earnings throughout the year. Analysts were beginning to perceive Paul Harris as a growth company, not one that was simply downsizing in response to its emergence from Chapter 11. January sales were up 30 percent from the previous year, based on a comparable number of stores, and increased 2 percent overall to $7.7 million from $7.6 million in January 1996, which included five weeks of operations. Net sales in December increased 16 percent to $39.9 million from $34.4 million the previous year, and comparable store sales for December were up a record 23 percent. That followed the highest third quarter net income in the company’s history, $.17 per share or $1.8 million.

Under the leadership of Charlotte Fischer and her customer-focused management team, Paul Harris appeared to be well positioned to move ahead. The company’s merchandising focus was centered on affordable outfits for women that could be easily mixed and matched to create a distinctive “Paul Harris look.” Some analysts believed that Fischer would significantly expand Paul Harris in the coming years into a national chain.