Rose’s Stores, Inc.

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Rose’s Stores, Inc.

P.O. Drawer 947
Henderson, North Carolina 27536
U.S.A.
(919) 430-2100
Fax: (919) 492-4226

Public Company
Incorporated: 1927 as Rose’s 5-10-25 Cent Stores
Employees: 8,800
Sales: $756 million
Stock Exchanges: NASDAQ
SICs: 5632 Women’s Accessory & Specialty Stores; 5611 Men’s & Boys’ Clothing Stores; 5719 Miscellaneous Home Furnishings Stores; 5945 Hobby, Toy & Game Shops

Rose’s Stores, Inc., operates a chain of more than a hundred discount stores in a region extending from Delaware to Georgia and westward to the Mississippi Valley. The 24,000- to 76,000-square-foot stores, which primarily serve populations of less than 50,000 people, carry a wide variety of general merchandise items, including clothing, shoes, household furnishings, small appliances, toiletries, cosmetics, sporting goods, automobile accessories, food, yard and garden products, electronics, and occasional furniture. Since its inception in 1915 as a “5, 10, and 15 Cent Store,” the company has restructured itself several times in adapting to an increasingly competitive market. During the 1960s and early 1970s, Rose’s expanded into one of the nation’s fastest growing variety store chains, ranking in the top ten in sales during the 1960s. But a flood of new competition in the mid-1970s and the ensuing entrance of its two principal competitors—Kmart and Wal-Mart, who now control roughly one-sixth of the $600 billion market—knocked the company out of the top 100 in the mid-1980s and ultimately brought on Chapter 11 bankruptcy in September 1993. However, by redefining itself as a discount merchandiser, downsizing its operations, and tailoring its marketing strategy specifically to the needs of its lower income shoppers, the company successfully emerged from bankruptcy in April 1995, following one of its strongest years in decades.

More than twenty years before Paul H. Rose founded the company that would one day bear his name in more than 250 stores throughout the Southeast, the 12-year-old entrepreneur set up a wooden box in front of a Seaboard, North Carolina drugstore, selling lemonade and cookies supplied by his mother. His first “store” later evolved into a mail order business, in which he advertised a hair straightener in the Home Folks Magazine. While the product lived up to its billing, it also served as a hair remover, prompting a visit from the Federal Food and Drug Administration and the end of his fledgling establishment. After attending business school in Virginia, Rose opened a small dry goods store in Littleton, where he put empty shoe boxes on the shelf and wrapped remnants of cloth around pieces of cardboard in order to give the appearance of a fully stocked store. Known for his creative sales promotion, he also held regular “popular girl contests,” in which votes were cast by purchasing a specific type of candy, with the results posted each evening to generate interest in the store. Attracting the attention of a New York candy manufacturer, Rose was hired as a candy salesman and wholesale buyer, but he grew tired of the travelling the job demanded and returned to North Carolina to open a chain of his own stores. With the partnership of two other men, he started two United 5 and 10 Cent Stores in Charlotte and Henderson. In 1915, after one of his partners failed to meet his financial commitment, the 34-year-old Rose borrowed $500 to purchase the Henderson unit and opened up the first Rose’s 5-10-15 Cent Store.

With his wife Emma assisting him, Rose worked up to 18 hours a day maintaining and improving his store, setting aside nearly all of his profits for future expansion. Living by one of his favorite aphorisms, “Where there’s a hill, there’s a valley; where there’s disappointment, there’s a compensating blessing,” Rose allowed himself only a $1500 salary during his first year. And in 1916 he added a store in Oxford, 11 miles away, enlisting the managerial services of his 19-year-old brother, Thomas B. Rose, who would later take over the company. By 1921 the Rose operation included a chain of eleven stores, as well as a wholesale warehouse and distribution facility in Henderson known as the Rose Merchandising Company, which kept the stores stocked with about 300 items. With the addition of a traffic department in the mid-1920s, which significantly lowered operation costs by finding the most cost-effective method of transporting goods, Rose added another 19 stores before the first shares of Rose’s stock became available for purchase in 1927. With the capital furnished by the new stockholders, Rose’s was able to expand at a rate unprecedented by a merchandiser of its kind in the South: during the 18-month period ending in October 1929, Rose’s opened approximately one store a month throughout North Carolina, South Carolina, and Tennessee, including a state-of-the art, 7,200 square-foot store in Henderson.

Despite the challenges that accompanied the Great Depression and the entrance of the United States into the Second World War, Rose’s continued to prosper, growing into one of the leading variety store chains in the South. While countless businesses collapsed during the 1930s, Rose’s not only survived but experienced a steady increase in sales and expansion. In addition to boosting sales from $1.8 million to $5.6 million by the end of the decade, the company surpassed the 100-store mark, extending its operations into the five states of North Carolina, Virginia, South Carolina, Tennessee, and Georgia. A large part of the company’s success during this period can be attributed to its commitment to efficiency. The decade saw Rose’s add a company print ship and a 20,000-square-foot consolidated warehouse, enabling the company to reduce office and transportation costs by as much as 40 percent.

As the company entered the 1940s, world events again brought new challenges to the company. As hostilities in Europe grew, Congress passed a draft law that promised to create vacancies in numerous labor and management position within the company. Seeing that the U.S. involvement in World War II was imminent, the company began training women to fill these posts in its 118 stores. And when the war started, Rose’s was prepared to make the necessary personnel changes: by 1944, 32 women were serving as managers. The nation’s commitment to the war effort, though, brought about a shortage in labor and raw materials for manufacturing suppliers, forcing many suppliers to ration goods to the stores on a quota basis. Despite the fact that stores were rarely fully stocked, sales increased every year during the war and four stores were added.

The end of the war and the economic boon in the U.S. economy that followed enabled the company to implement several innovative management and marketing strategies. In addition to establishing a group health insurance plan and a Profit Sharing Trust Plan, Rose’s added a trucking division that shortened the time required to deliver merchandise from the Henderson warehouse to surrounding stores. The appearance of the Rose’s stores also underwent a significant change. Until 1947, all of the stores prominently displayed goods in the large windows at the front of the store, an advertising technique that required not only a great deal of merchandise to make them look full but a significant amount of employee time to maintain. When it came time to remodel a store in Durham, Paul Rose went with a new design featuring untrimmed windows that allowed anyone to see directly into the store. The grand opening of the new store was such a success that all future stores were designed according to the “see-through” concept. The founder’s entrepreneurial drive also brought significant returns on the company balance sheets: in 1948 Rose’s generated $17.6 million in sales and recorded its highest net profit in relation to sales, a mark that would stand for nearly two decades.

Rose’s moved into the 1950s as a thriving 130-store outfit on its way to becoming a giant in the variety/general merchandise industry. While the company would continue to prosper, it would do so without the leadership that had guided the company through the Great Depression and two wars. With the death of Paul Rose and three other top executives came the need for a new management team. Thomas B. Rose, succeeding his brother as company president, led a new team of managers dedicated to further expansion. In keeping with its strategy of growth through innovation, the company implemented its first computer system in 1953. But the IBM data processing equipment proved unsatisfactory after about a year. Undaunted, company management replaced the machinery with Remington Rand Univac equipment that, after a brief period of transition, proved successful. While making the transition to “self-service” stores, the company also added a new 115,000-square-foot warehouse division, Rose Merchandising Company, and introduced luncheonettes, snack bars, and garden shops to its stores. By 1959 sales reached a record high $38.8 million— leading all the country’s variety stores in increase of sales for that year. And at that year’s Christmas party, President “T. B” Rose boldly predicted that the company would surpass the $50 million mark before man reached the moon.

It would take only two years for the prediction to come true, and by the time Neil Armstrong took his historic step, Rose’s had nearly quadrupled its volume of sales and had expanded to 183 stores. Having first entered shopping centers in 1947, the company continued its move from the small variety store to the large self-service department store. While improving upon older, small-town units periodically through modernization, new units took the form of large, self-service, junior department stores, located primarily in suburban shopping centers. In the early 1960s, under the direction of president L. H. Harvin, Jr., the company also enlarged its operations through diversification, entering the discount market with the construction of a large store in Spartanburg, South Carolina, in 1961, and adding upscale merchandise to its product line by acquiring the Paul H. Rose Corporation—an offshoot of Rose’s founded in the early 1940s—as a subsidiary and opening up three full-line department stores. In an effort to better reflect this broader focus, the company changed its name to Rose’s Stores Inc. in 1962.

The early 1970s saw the company continue its transition into a general merchandise superpower. While Rose’s had become one of the country’s top ten variety store chains in the early 1960s, it exploded into one of the fastest growing general merchandise/variety chains in the South, opening an average of 20 stores a year, each in the 40,000- to 60,000-square-foot range. The company’s growth during this period, to be sure, was the result of its strategic move to larger stores. For instance, in 1971 the average sales per store surpassed the $1 millon mark for the first time, and units opened between 1969 and 1972 accounted for half of the company’s total sales. Much to the approval of its stockholders and the U.S. financial community, this growth was achieved without making acquisitions or using long-term debt financing. By the time Harvin stepped down as president and CEO in 1979, the company had achieved sales of nearly $500 million, a figure almost ten times larger than when he first took office 16 years earlier. Although sales had continued to climb during the mid- and late 1970s, profits were undercut by a flood of competitors that had moved into the Southeast. Companies such as Edwards, Big-K, Zayres, and Hills, as well as a recessionary economy, slowed Rose’s net earnings. For the first time in its history, the company lost money in 1974, as the ratio of net profit to sales dropped to less than two cents on the dollar. And by the end of the decade all of the Paul Rose upscale department stores were closed.

The first major wave of competition called for a new marketing focus, and Lucius H. Harvin III, succeeding his father as president and CEO in 1980, was given the responsibility of redefining the company. He assumed leadership of a company whose growth, according to some analysts, exceeded its ability to keep its existing stores up to date with a changing retail environment. As a result, many of its stores, while large and favorably located, relied on antiquated merchandise assortments and presentations. These problems were compounded by the vast dissimilarity among Rose’s stores, which ranged from 4,000 to greater than 60,000 square feet, making it difficult for the company to implement a coherent marketing strategy. With Lucius Harvin at the helm, though, the company restructured itself as a discount store and made changes accordingly. In late 1982, the company initiated a strategic planning process that led to the reshaping of Rose’s basic design and conceptual framework: existing stores were remodeled to enhance merchandise display and improve traffic flow; apparel sales were underscored; inventories were augmented. In line with the new focus on discount store business, nearly all of the P. H. Rose variety stores were sold by the end of 1983. The new strategy resulted in a record boon for the company: Rose’s stock split twice in 1983, leading to the first public offering of stock since 1927; two years later, the company broke the $1 billion sales barrier.

In 1987, just as Rose’s completed a 12-month period in which its stock price increased faster than that of any other southeastern company, the company’s customer base was diminished by the opening of 53 new Wal-Mart stores. Although sales continued to climb steadily, net profits declined nearly 25 percent, the direct result of competition and large capital expenditures needed to upgrade the company’s distribution and information systems. As the decade drew to a close, sales records continued to be broken, but net profits plummeted as at least two-thirds of the company’s 259 stores were engaged in head-to-head competition with their two major competitors, Wal-Mart and Kmart.

In mid-1991 a new management team, led by President and CEO George L. Jones, a former top executive with Target Stores, was selected to help the company reverse the decline brought on by competition. Their plan called for a thorough remerchandising of their stores, which involved eliminating categories of slow-moving merchandise and replacing them with products better suited to Rose’s target “value-oriented” customer. For instance, instead of offering a complete line of hardware products, Rose’s reduced its line to include a limited number of tools and materials designed for light “do-it-yourself” tasks. On the other hand, the company’s traditionally strong departments—toys, health and beauty aids, and lawn and garden, for instance—were expanded. Likewise, the company mounted a “Greatest Deal on Earth” campaign, featuring an assortment of first-quality merchandise at “closeout,” or significantly reduced prices, in an attempt to provide attractive opportunities for unplanned purchases. While restructuring its product line, Rose’s also took advantage of new technology to improve customer service and store space management, implementing a state-of-the-art computerized price removal and inventory replenishment system.

Despite these efforts, the company continued to lose money and had difficulty maintaining its inventory due to credit problems, leading to poor sales performance. And on September 5, 1993, the company filed a voluntary petition for relief under Chapter 11, Title 11 of the U.S. Bankruptcy Code. After closing more than a hundred stores in the first half of 1994, Rose’s secured an exit financing commitment from the First National Bank of Boston and the CIT Group/Business Credit, Inc., calling for a three-year revolving credit agreement that enabled the company to borrow up to $125 million. Under the direction of a new president and CEO, R. Edward Anderson, who took over in August 1994, the company finished the year with sales of $756 million, a decrease of more than 40 percent. However, the company recorded operating profits of $6.6 million, compared to a loss of $27 million the previous year, and entered 1995 with the operating cash flows necessary to emerge from Chapter 11. After turning in its best overall performance in several years, the company looked forward to leaving behind the complicated distractions of financial reorganization and returning to its focus on the operational aspects of the business.

With 75 percent of its stores in direct competition with Wal-Mart or Kmart and 60 percent forced to contend with both, Rose’s has attempted to prosper in the mid-1990s by further narrowing its marketing focus within the discount industry, targeting value-conscious lower income consumers by offering special senior citizens’ discounts and double-coupon deals, emphasizing closeout merchandise, and prominently displaying discounted goods. “We feel our niche is narrower and more toward the lower end,” Anderson told Discount Merchandiser’s Pat Corwin in March 1995, “so we want our customers to see value very quickly when they walk into our stores. We don’t want it to be subliminal, we want it right in their faces.” And with a strong belief that there are people who still believe in the 80-year-old Rose’s name, Anderson has predicted that, under stable economic conditions, the company will grow once again.