More cuts planned by Merry-Go-Round Chain to close 375 stores, eliminate Chess King division

A 40-percent reduction

Move is linked to Chapter 11 filing by Joppa-based firm

November 14, 1995|By Alec Matthew Klein | Alec Matthew Klein,SUN STAFF

In the most drastic cutback in its 27-year history, Merry-Go-Round Enterprises Inc. announced yesterday plans to close about 375 stores -- a move that will eliminate 40 percent of the Joppa-based chain as well as hundreds of employees.

The move, which was expected, is intended to raise cash, cut losses and focus on stores that have the best chance of resuscitating the troubled apparel retailer.

The latest round of store closings, to begin after Jan. 1, will eliminate Merry-Go-Round's Chess King stores division and leave the national chain of youth fashions a shell of its former self.

When it filed for Chapter 11 bankruptcy reorganization in January 1994, the company operated 1,445 stores. But after the latest round of store closings, there will be about 575 left -- a 60 percent drop. Just over the past year, about 270 stores have been shuttered.

Less than a week ago, the company labeled as "rumors" the prospect of massive store closings and layoffs reported in The Sun. But yesterday, the company began informing employees of their fate.

Merry-Go-Round officials declined to disclose how much the company expects to save from the cutbacks, which stores will be closed or how many employees will be laid off. But based on the number of stores being closed, layoffs could reach more than 1,000 at headquarters and in the field. The retailer, which employed 13,911 nearly two years ago, has already cut more than 4,000 employees since filing for bankruptcy and now has a payroll of about 7,000 to 7,500.

"Although difficult, this is a positive move for the company," said Richard P. Crystal of his first major act since July 10, when he became the retailer's fourth chief executive officer in two years. "It positions us to grow again and become profitable more quickly."

Among the casualties, according to a source familiar with the company, is Louis Spagna, the popular leader of the Dejaiz division, which sells brand-driven merchandise. Mr. Crystal declined to comment on the departure of Mr. Spagna, only saying that another executive had taken his place.

Mr. Crystal also declined to comment on the terms of severance pay for affected employees, but a source said that the package includes eight weeks of salary, vacation time and a week of pay for every year of service, with a minimum of two weeks paid out.

As part of the massive retrenchment, Mr. Crystal said the company will put about 40 of the estimated 180 Chess King stores under the names of its three remaining core divisions: Merry-Go-Round, Cignal and Dejaiz. The rest of the Chess Kings, which focused on moderately priced young men's clothing, will shut down, closing the books on a $46.2 million acquisition in May 1993 that many in the industry said triggered Merry-Go-Round's decline.

"Chess King was one acquisition that should never have been made," said Leonard "Boogie" Weinglass, who founded Merry-Go-Round in 1968 with one store in Atlanta and who has since moved to Aspen, Colo. "That was a mistake. The men's business was already going south."

Mr. Weinglass also lauded the company's decision to scale back stores across the board.

"I feel sorry for the people getting laid off, but it's the right thing to do," he said. "Obviously, the stores being closed are losing money."

Indeed, the company attributed the sweeping cutbacks to the need to get out of languishing stores, raise cash and improve sales.

"We wanted to spend our energies on our best-performing stores," Mr. Crystal said.

But industry observers reacted yesterday with less certainty that the scaling back would work.

"They're using a meat ax on the remaining stores in an attempt to salvage the company," said Alan G. Millstein, editor and publisher of the Fashion Network Report in New York. "Obviously, management has come to the conclusion that a live baby is better than a dead baby. This may or may not be the salvation of this company."

The rescue of Merry-Go-Round has been long in coming. Sales at stores open at least a year, a benchmark measurement of performance because it factors out sales in new stores, have not registered a gain since December 1992. And shareholder equity has plummeted from $191.2 million in fiscal 1994 to $5.7 million a year later.

"The company is doing what it can to stay alive and survive," said Stephen Selbst, attorney for the official equity committee of Merry-Go-Round shareholders. "Six hundred stores is not 1,500 stores, I'm not going to try to kid you about that, but it's still a national chain. If it means they can survive and they can focus, there may be some upside to this."

The downside, he said, is that "for the short and medium term, you're losing the possibility of future sales."

As recently as 1991, there didn't seem to be a downside for Merry-Go-Round as it zeroed in on the fashion trends that sold. But then, the retailer banked heavily on the appeal of "hip-hop" clothing when the mood of adolescents was swinging toward the "grunge" look. The company was left with millions of dollars worth of merchandise that wouldn't sell, and a cash crisis was ignited.

Since then, negative numbers have snowballed. In December, in a similar move to return to profitability, the company announced the impending closing of 200 stores and the elimination of 70 employees -- about 10 percent -- of the work force at its Joppa headquarters.

Although the retailer has been forced to cut again, some shareholders still believe there is hope for a turnaround.

"Being a stockholder, we are eternally optimistic," said Stephen Shaw, 32, of Reisterstown.

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