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RUSTIC CHARM

Stage Stores stays out of major metro areas, relying more on rural customers

By Debra Hazel

Why shouldn’t a shopper in “Mayberry” have access to the same brands as a shopper in Manhattan? Well, why not, indeed. Providing such access has proved a profitable business for Stage Stores, which operates 540 small fashion department stores in rural areas and country towns.

Stage brings big brands to small markets, on a platform of knowledgeable sales staff and attention to customer service. The company runs 18,000-square-foot stores under the Stage, Bealls, Palais Royal and Peebles names, bringing rural shoppers Tommy Hilfiger, Polo Jeans and other brands they would normally find only at national department stores in much larger markets.

“We are the Macy’s of a small town,” said James R. Scarborough, chairman, president and CEO of the Houston-based company.

Though smaller than big-city department stores, the Stage divisions’ units offer women’s, men’s and children’s apparel, accessories and cosmetics in bright stores. Few competitors, a reputation for customer service and a long history in some of its markets have earned the company enviable customer loyalty.

“Stage offers national brands, and we believe they do a better job of merchandising their apparel departments than Wal-Mart,” said Paula Kalandiak, a senior research analyst at Roth Capital Partners, a Newport Beach, Calif.-based investment bank. “The apparel offering is probably more on a par with JCPenney and Kohl’s than Wal-Mart, but JCPenney and Kohl’s aren’t available in most of Stage’s markets yet.”

They might never be. Though about 30 of Stage’s stores are in bigger markets, the great majority of its units are located in markets with fewer than 150,000 people. Many, in fact, are in towns of about 10,000, so the reference to TV’s fictional North Carolina town of Mayberry is appropriate, Scarborough says.

A casual observer might think that small-town locations are riskier economically. But people choose today to live in smaller towns for a variety of reasons. “It’s family-oriented, with clean air,” Scarborough said.

Stage’s target shopper is a woman between 25 and 59, from a household with a yearly income of at least $35,000. Furthermore, that customer is less affected by the vagaries of the economy, Scarborough says. Though average household incomes in these markets may be lower than in major metro areas, so are housing costs, which leaves more disposable income.

As for today’s higher energy costs, they are actually good news for Stage. About half its units are located in Texas, where rising oil prices means more work at the refineries for these consumers, along with overtime pay.

In addition, markets with about 10,000 people have less competition in the branded merchandise for which Stage’s stores are known. Besides Polo and Hilfiger, the brands carried include Keds, Nautica, Rafaella and Van Heusen. Such competitors as Macy’s, JCPenney or Wal-Mart may carry some of the brands found in a Stage unit, but no other retailer carries all of them. Small-town residents would have to drive an hour or more to find a regional mall with the apparel brands they want, but thanks to Stage, they don’t have to.

“In many of their markets, there are very few choices other than Wal-Mart and some type of dollar store, and no other options for such brands as Polo, Fubu and Liz Claiborne,” Kalandiak said.

Convenience is important to rural shoppers, who are often two-income families, just like their big-city counterparts, and are therefore just as time-strapped. That is a major reason Stage usually locates its stores in supermarket- or discounter-anchored neighborhood centers.

“People don’t have time,” said Mel B. Ward, Stage’s senior vice president of real estate. “Going to the mall these days is a hassle. A lot of our people are soccer moms or Little League dads.”

On the customer service front, a shopper loyalty program rewards customers who spend $750 in a year using a store credit card. The more these shoppers spend, the more discounts and benefits they accrue.

“We had a bronze, silver and gold credit card 30 years before the airlines,” Scarborough said, referring to the air-carrier reward programs.

Such benefits help Stage compete even in larger markets. In Houston, for example, “our cross-shopping is with Foley’s, yet we still do well,” Scarborough said.

And the chains offer a personal touch that larger department stores are hard-pressed to match. Many of the employees have been with their stores for years, even decades, and they know their customers. Indeed, many of the stores go back for decades, even though the parent company is less than 20 years old. This is because Stage was formed through a series of mergers of small-market-oriented department stores. In 1988 Houston-based Palais Royal, then a chain of 34 stores, merged with Bealls, which had 113 smaller units in rural Texas towns. The two, both of which were founded in the 1920s, formed Specialty Retailers.

In 1994 Specialty Retailers acquired 45 units from Beall-Ladyman, located primarily in Arkansas, Louisiana and Mississippi. By the first quarter of 1995, all had been converted to the Stage name. The next year the company, by then called Stage, acquired Uhlman’s, a 34-store chain operating in the north and Midwest, and rebranded its stores as Stage units.

Acquisitions continued rapidly. In 1997 the company acquired C.R. Anthony, an Oklahoma City-based chain of 246 stores in 16 central and Midwestern states. These were rebranded as either Stage or Bealls stores.

This expansion activity did not go entirely glitch-free, however. Stage filed for Chapter 11 in 2000, but re-emerged 14 months later, following the closing of a number of units. In 2003 the company resumed its growth, acquiring Peebles, based in South Hill, Va. Peebles, a small department store, operated 136 units in 17 mid-Atlantic, Southeast and Midwest states.

Today Stage is healthy again. Year-on-year total sales for the year ended Jan. 29, 2005, rose 27.9 percent to $1.24 billion, primarily reflecting the Peebles acquisition. Comparable-store sales for the year rose 2.5 percent, versus a decrease of 3.7 percent the year before.

And there is plenty more growth to come, executives say. Plans call for a 600-store chain by the end of fiscal 2006. Ultimately, Scarborough says, Stage could double in size. “They still only have stores in 29 states,” Kalandiak said. “We believe that they can continue to expand into contiguous states.”

The company still has no units in the West, but its expansion focus remains on the Midwest. There is one state in particular where the company is unlikely to open stores anytime soon, Scarborough says. “I’m not too excited about California,” he said. “It’s crowded, and we have a lot of opportunities elsewhere.”

The majority of new stores will operate under the Peebles banner, simply because the Peebles regions present the greatest growth opportunities, he says.

And even if competitors start looking at smaller markets, Scarborough is confident the company can hold on to the Mayberry customer. “When Kohl’s came to town, our comps in that market dropped only 2 percent,” he said. “We have an extraordinary level of customer service, and the employee level is extraordinary.”

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