Musicland's Efficiency Drive Produces Upbeat Results
By CALMETTA Y. COLEMAN
Staff Reporter of THE WALL STREET JOURNAL
July 20, 1999
Musicland Stores Corp. has something to sing about: After 10 years of second-quarter losses, the operator of the Sam Goody chain expects to report Tuesday that it turned a profit in the latest quarter.
The company's chairman and chief executive officer, Jack W. Eugster, said in an interview Monday that the company expects to report second-quarter net income of $1.5 million, or four cents a diluted share, compared with a year-earlier loss of $4.7 million, or 14 cents a share. Sales rose 3.8% to $381.1 million from $367.2 million in 1998, he said.
The profit beats a projected loss of three cents a share, based on a First Call/Thomson Financial consensus. It also begins to solidify a money-making trend from the previous quarter, the first time that Musicland had been in the black for the January-March period since 1988.
Musicland, based in Minneapolis, typically reports losses during the first, second and third quarters, when sales usually aren't large enough to cover fixed costs such as rent. But the retailer recently has become more efficient, using targeted marketing efforts, such as loyalty programs, to better manage inventory and boost comparable-store sales. During the second quarter, sales in stores open at least a year rose 4.4%.
'A Very Targeted Marketer'
"Our business has been good, and we hope that it will continue to be good," Mr. Eugster said. "We're trying to be a very targeted marketer."
The company has been improving shipments to its stores partly through a program called the Replay Club, which invites customers to provide information about their music preferences. Musicland uses that information, along with other demographic data, to determine what kind of music to stock in which stores. The club, started at Sam Goody in 1993, lately has been adding about 50,000 members a month and now has more than 650,000.
In addition to Replay, individual stores are tracking more data on their customers and using the information to boost sales. For instance, in May, the Musicland store in Oak Brook, Ill., used its own list of nearly 300 local jazz enthusiasts to draw a crowd to an in-store performance by pianist Jim Brickman. The artist signed autographs and played snippets of tunes from his Destiny album. The store sold about 300 of Mr. Brickman's CDs that day.
Because of just-in-time store delivery, Musicland also has been able to cut inventory costs. Three years ago, the retailer consolidated three small distribution centers into one larger site in Indiana. That one facility now carries less inventory for all 1,325 stores than it once did for just half the chain. The company has reduced distribution-center inventory by more than $100 million in the past two years.
Musicland's cash flow during the quarter was up 63% from a year earlier. Since 1997, the company has lowered net debt by about 45% to $197 million at the end of the quarter.
Just two years ago, Musicland was on the brink of bankruptcy, hurt by overexpansion and bruising competition from discount music sellers such as Wal-Mart Stores Inc. and Best Buy Co. But after closing underperforming stores, the retailer is holding its own. Its fastest-growing concept is On Cue, a chain that operates 163 stores in towns with populations of fewer than 15,000. The retailer uses its leverage with music companies to bring popular recording artists to such markets, giving the stores a hipper image than that of a discount chain.
Reduced Dependence on Music
But even as its stores prosper, Musicland has been shielding itself from the rowing competition for music sales. Last year, music made up only about 52% of total sales, down from 62% five years earlier. The company has been boosting sales of videos, books and other products.
Last month, it plunged into e-commerce, taking all those goods to the Internet under four separate Web sites tied to store chains Sam Goody, Suncoast, Media Play and On Cue. Analysts applauded the move as a way to leverage the brand names of the stores.
But investors seem unimpressed. The stock has hovered around $10 since the site was launched, down from a 52-week high of $18. It closed Monday at $10.8125, up 62.5 cents, on the New York Stock Exchange.
"There's been a disconnect of the fundamentals and the stock," said George Sutton, a Dain Rauscher Wessels analyst. "The world's very concerned that the formula for selling music has changed."
Musicland says it isn't worried about losing music sales to the Internet, and it's already taking its successful marketing efforts to the Web. The company recently began using customer e-mail addresses, collected through Replay, to send out electronic newsletters every two weeks with updates on new music and video releases.
This fall, the company will partner with PepsiCo Inc. to advertise its e-commerce addresses on Mountain Dew cans and bottles, going after the drink's youthful audience. Later this year, customers will be able to download music to make their own CDs from company Web sites, as well as through kiosks in stores.
"We really believe that the Internet is actually increasing the sale of music, and we're going to be everywhere," Mr. Eugster said. |
