Friedman's Inc.
|
Private (Public prior to 2005) | |
| Industry | Retail |
| Fate | Bankruptcy |
| Founded | 1920 |
| Defunct | 2008 |
| Headquarters | Savannah, Georgia |
Key people |
Bradley Stinn CEO Victor Suglia CFO Morgan Schiff & Co.- Phillip Ean Cohen Sterling Brinkley |
| Products | Jewelry |
| Slogan | The Value Leader |
| Website | None |
Friedman's Inc. was a US company that owned and operated fine jewelry specialty stores under the names Friedman's Jewelers and Crescent Jewelers. The company declared bankruptcy in 2008 and had shuttered all stores by June 2008. The company was established in Savannah, Georgia in 1920. Friedman's Inc. was headquartered in Addison, Texas. They were the third largest jewelry company in the US. Friedman's stressed value and low prices, owning the trademark "The Value Leader" and advertising "Unbeatable Values". Unlike many chain jewelers, Friedman's had many of its locations in power centers and strip malls, besides enclosed malls and outlet centers. The company had stated that they preferred locations anchored by a discounter "big box" store, almost always Wal-Mart. This fits with their core demographic of lower to middle income customers between 18 and 40.
Due to a bankruptcy filing in early 2008, Friedman's and Crescent liquidated all of their stores save for a small number of locations purchased by Whitehall Jewelers Inc. for approximately 14 million dollars. Whitehall went bankrupt shortly after the purchase and began liquidating all of its stores in August 2008.
Early history
The history of Friedman's may be traced to two brothers, Abraham and Benjamin Friedman, in south Georgia. In 1909, a merchant named Sam Segall came to the town of Savannah on the coast of Georgia, where he founded a jewelry store. In 1920, he died, and his two nephews Abraham and Benjamin took over the business. Because their name was Friedman, they changed the name of Segall's store. At some point Abraham moved away from Savannah, heading north to Augusta, on the Georgia-South Carolina line. Benjamin stayed behind, and in time they split up their holdings, which consisted of seven stores.
By all appearances the parting was amicable, and the two agreed that neither would interfere in the other's territory until their companies had grown more. Thus out of the line of Abraham came A. A. Friedman, an Augusta-based jewelry chain with 127 stores in 1997; and from the line of Benjamin came Friedman's Inc. For generations, it appeared that there would be no conflict between the descendants of Abraham and the descendants of Benjamin, because both were family-owned businesses.
However, by the late 1990s, Benjamin's former stores would no longer belonged to Benjamin's children. By contrast, A. A. Friedman remained under the control of the Augusta, Georgia Friedmans. Ultimately the two companies would clash over the right to the Friedman name, but before the owners of Friedman's took their troops into the fray, an empire would have to be built.[1]
Regional growth
For 70 years, the store founded by Benjamin Friedman remained well outside the limelight. As with many a private company later acquired by an outside investment firm, most of Friedman's early history is all but forgotten, with one notable exception. Having built its business, with mall-based retail stores – is typical of most jewelers—Friedman's in 1979 found itself in a difficult position. It already had one store in a certain mall, and desired to open a second one for reasons that are no longer clear. Friedman's management did not want to confuse customers by operating both stores under the same name, so they developed the "Regency Jewelers" tradename.
According to the company's 1998 annual report, "Since then, the company has continued the use of the name when it deems it to be advantageous for advertising or marketing purposes. The company also uses the 'Regency Jewelers' tradename in 37 locations as of September 30, 1998. With the acquisition of all the rights of A.A. Friedman Co., Inc. of Augusta, Georgia ... to the Friedman's Jewelers tradename, the company plans to change substantially all of the Regency Jewelers stores to Friedman's Jewelers stores during January 1999." Conflict over names—Friedman's and Regency—would be a recurring theme for the company.[1]
Morgan Schiff acquires Friedman's
In a 1995 profile of Friedman's, Scott Thurston of the Atlanta Journal and Constitution described it as "no newcomer." Over the course of its first 70 years, he wrote, it had become a "quietly profitable family-run company" which by 1990 had 48 mostly mall-based stores. In the latter year New York investor Phillip Ean Cohen and his investment firm of Morgan Schiff & Co. formed a partnership and purchased Friedman's for $50 million from the Friedman family.
Morgan Schiff already owned a similar company, Crescent Jewelers of California, and perhaps its experience prepared it for the vicissitudes of the industry. Certainly its first two years as owner of Friedman's would have been disappointing to any owner lacking in a long view: "Initial results were dismal," wrote Thurston, "as the recession and buyouts drove Friedman's into the red in 1991 and 1992."
The turning point for the company came in 1993, when Morgan Schiff brought in Bradley Stinn as chief executive officer. Just 27 years old when he became a managing director for Morgan Schiff in 1986, Stinn had served as chief financial officer for Crescent Jewelers from 1990 to 1992. When he arrived in Savannah to take over Friedman's, he was only 33.
Stinn, in turn, attributed the company's turning point to a visit he made in 1992, when he was driving through south Georgia with Robert Morris, executive vice-president for store operations. On their way to Florida to visit Friedman's outlets there, they stopped at the coastal town of St. Mary's, a city with a mushrooming economy thanks to the flow of purchasing dollars from Navy personnel stationed at the nearby Kings Bay Submarine Support Base. Stopping at a strip mall with a Wal-Mart as its anchor store, Stinn offhandedly asked Morris, "Think you could do business with a store here?" Morris answered, "I could do business out of my trunk here." The rest, as Thurston reported, was company history: "Before leaving town they tracked down the shopping center's owner and signed a lease on the hood of his car. That episode—and the subsequent success of the St. Mary's store—′ompted Stinn to go full-bore with what he calls a 'Wal-Mart vapor trail' expansion strategy. So far, the results have been lustrous."[1]
The power strip mall strategy of the mid-1990s
Thus was born what would become Friedman's strategy in the mid-1990s, as it defied tradition and embarked on a pattern of wild growth. Historically, jewelry retailers had established their locations in elegant-looking mall stores—which carried a hefty price tag. Stinn, on the other hand, proposed to put Friedman's stores in "power strip malls" like the one in St. Mary's. Whereas malls were collections of stores under one roof, their doors opening into a common area, strip malls were strings of separate stores with doors all facing toward a vast parking lot. The strip mall's "anchor" (or primary store in the group) drew customers who would presumably visit other stores as a result of stopping at the anchor, usually either a supermarket or a discount retailer such as Wal-Mart. The "power" designation simply suggests the great volume of shoppers drawn in by the anchor.
Certainly power strip malls lacked the cachet associated with traditional shopping malls, but they also lacked the costs as well. According to Pablo Galarza of Investor's Business Daily, a retailer could in 1994 set up a store in a power strip mall for about $225,000. If the owner then chose to "walk away" and cancel his lease, he would pay a penalty of perhaps $40,000. By contrast, in a large indoor shopping mall a retailer would shell out $400,000 just to get started, and a whopping $490,000 if he chose to walk away.
In the words of Craig Weichmann, an analyst for Morgan Keegan & Co., "Schiff ran the numbers and the light bulb went of. Power strip malls offer attractive economics compared to large mall stores. Not only is competition less intense in power malls, there are more of them." Referring to two extremely upscale jewelry stores, Stinn told Galarza, "We aren't looking to be Tiffany's or Cartier. We're interested in selling to the average working person."
From 48 stores in 1990, the number of Friedman's retail outlets grew more than threefold in the next several years. As Phillip Carter wrote in 1995 in Investor's Business Daily, "Company officials said Friedman's has just begun growing. Of the 750 retail stores it hopes to acquire in the Southeast, it has only purchased 158." Among the factors contributing to this runaway growth were the installment of a new computer system, of which CFO John Call said, "Prior to the installation of that system, the company was operated manually, if you will. It allowed us the platform from which to control growth—that was a big add."
This facilitated a change in the way the company offered credit, allowing point-of-sale credit agreements. By contrast, Carter wrote, "At Zale's, customers fill out credit applications. These are electronically processed at a central location while the customer waits in the store. If these requests for credit lines are rejected, customers can be embarrassed.... Friedman's policy gives the local employee and store manager the power to issue credit up to certain limits at the store level."
Thus technology helped the chain put into practice its policy of giving managers greater power over individual stores. With this freedom came greater responsibility, and Friedman's likewise compensated its "partners" (as Stinn began calling managers) on the basis of their store's sales and rate of collection. It was a system that, according to Stinn, "attracts people who want to stand on their feet."
The late 1990s and eventual bankruptcy
In the year that ended September 30, 1997, Friedman's opened a staggering 83 locations. By then it had become the third-largest jewelry retailer in the country, and in the seven months between the end of the 1997's fiscal year and an April 1998 interview with Stinn in Jewelers Circular Keystone, the company had added 40 more locations while net income rose by a phenomenal 39 percent. However, the company's rapid expansion came with a pricetag. The company had over 650 stores by 2000. When the dotcom bubble burst, and the economy worsened, Friedman's loans became illiquid. The over demanding presence of Morgan Schiff led management believe that they could be fired the first mistake they made. Not wanting to face the repercussions of over leveraging bad loans, Brad Stinn and his CFO lied to Schiff and the public about the liquidity of their consumer loans.
The government said Stinn and others filed financial reports and made public statements that misrepresented the operation of the company's installment credit program, the delinquency and collectability of its outstanding credit accounts, and its earnings, As a result, the company's stock price was artificially inflated.
As an example, prosecutors reportedly alleged that Stinn and other executives learned in June 2002 that, due to a computer error, certain credit accounts totaling about $7.9 million had not aged properly. The files became known secretly in the company by a couple of names, including the "X-files."
Prosecutors alleged that Stinn and others working at his direction deliberately concealed the existence and financial effect of these accounts, instead of charging them off as required under the company's publicly disclosed credit policies. As a result, the company materially overstated its currency percentage and materially understated its delinquency percentage for fiscal year 2002.[2]
Credit operations before 2004
There were dire consequences for the company and its credit portfolio as a result of their credit practices.
With sales operations in charge of their own credit lending, a “fox guarding the hen house” atmosphere was created, which resulted in undisciplined, inconsistent, and damaging business practices. Loans were made to borrowers based on unsophisticated, simplistic scoring models, and many decisions were derived from emotion and a sales team’s immediate need for results instead of a customer’s credit worthiness. Store managers dealt with influences such as sales quotas, pressure from superiors, and the customer’s presence in the store expecting to be approved for a credit line. From time to time, regional supervisors and group vice presidents would also issue credit approvals.
What made this process even more volatile was the fact that none of the sales operations personnel had any type of formal training in credit evaluation or analysis by Friedman’s, nor was such knowledge of credit made a prerequisite in order to hold a sales associtate, or even a management position.
Most loans made at Friedman’s locations were considered to be in the subprime category by many creditors’ definition. This further complicated Friedman’s efforts to maintain a good portfolio as subprime borrowers (many with no credit history at all) in general were either not credit savvy, or lacked the ability or willingness to pay their bills on time, and in some cases, at all. Compounding these issues was the fact that many of these customers were allowed to continually make additional purchases on their accounts, thereby increasing the risk exposure to the company.
Due to an extremely poor anti-fraud system, credit fraud, committed by both customers and store personnel, was rampant. In many cases, delinquent customers were allowed by store personnel to make additional purchases on their accounts. This, along with a myriad of other credit policy violations occurred frequently.
Optically, Friedman’s attempted to make their portfolio look in better condition than it was by reporting recency instead of currency. While currency would report accounts in a portfolio less than 30 days contractually current, recency reported accounts that had made at least one full payment within a 90 day time period as contractually current. Subsequently, this practice prevented accounts from being charged off that were severely contractually past due. For example, an account opened in December 2001, and scheduled to pay 12 payments, would only have to pay four in the months of March, June, September, and December 2002 to be considered recent by January 2003.
Along with a decentralized credit issuance policy, Friedman’s also attempted to maintain a decentralized collection approach. This was, however, a handicapped attempt at best as very few Friedman’s locations had dedicated collectors and collections were expected to be made by store managers and other store personnel. Obviously, as with the case of credit granting, sales were given top priority by managers and sales people alike, while credit and collections took a noticeable back seat.
Although Friedman’s did have a Vice President of Credit, it was largely viewed as an obligatory role, having no authority over underwriting or collections. Being in charge of Friedman’s credit largely dealt with administrative responsibilities, and had little influence over anything substantive. Any suggestion made by the VP of Credit that hinted of improving underwriting standards at the expense of sales was met with companywide protests from the sales team, as well as opposition, and at times, open hostility from executive management. Enforcement of credit policies was also not in the hands of the VP of Credit. That was left up to sales operations, and resulting disciplinary action was rare.
In the face of mounting delinquencies and increasing potential charge-offs, Friedman’s would heavily pressure its sales operations to improve collection results, going so far as to threaten certain incentive pay checks if specific goals were not met. However, there was also a constant pressure to obtain comparable store sales increases. Thus, a vicious circle was created for sales operations to make sales goals by doing ill advised credit deals, and then try to dig themselves out of the delinquency mess those same deals created.
Ultimately, Friedman’s downfall rested upon their continual misstating of quarterly and yearly earnings whose bottom lines were heavily influenced by the amount of dollars the credit portfolio charged off. Friedman’s executives routinely engaged in the practice of holding accounts that had no chance of paying from being charged off when they should have been, thereby lessening a negative impact to the bottom line. In some cases, accounts could go almost a year without making a payment of any amount, and still not be charged off of the company’s portfolio.
The health of the credit portfolio was misrepresented numerous times by CEO Brad Stinn and CFO Vic Suglia on shareholder conference calls and U.S. Securities and Exchange Commission (SEC) filings.
In the end, Friedman's became a company that did not rely on (or even develop) its abilities in marketing, merchandising, and selling jewelry. Instead, its survival became overly dependent on abusing what should have been only a tool to procure sales: in-house credit.
Credit operations 2004 - 2008
When new management took over in 2004, Friedman’s replaced its credit operation team. The new team brought in a third party credit provider to attract a better credit customer, while keeping their own in-house program for the near- and subprime borrowers. Changes were made to the credit underwriting, and collections were centralized. Changes to the underwriting, however, were only allowed to go so far. A modern revamping initiative of the underwriting process was not allowed or budgeted for in spite of ambitious proposals and designs by the new credit operation team. Instead, only limited changes were allowed to Friedman’s in-house credit issuance policies, due in large part to the executive management’s underlying fear of a potential impact on sales. However, the longer the broader changes were not implemented, the harder it became for the company to sacrifice risky credit sales in exchange for more sound underwriting policies.
Although the company was able to transition from recency to currency reporting because of vast improvements from the centralizing of collections, charge off still remained a glaring issue as the board and investors called for better results. Nobody outside of credit operations, however, was willing to sacrifice any sales in order to make improvements in charge off results. During 2007 in particular, there was an aura of desperation among sales operations to procure any sale they could.
Facing an inconvenient reality, Friedman executives and some board members would continually dismiss the fact that the coexistence of low charge offs and high risk credit deals issued through a poorly designed model was a theoretical and practical impossibility. Insistence and suggestions for revamped and improved credit issuance measures by members of the credit operation team were largely ignored and would ultimately give way to sales operation’s need for favorable comparable store sales.
It is widely speculated that similar attempts at underwriting reforms made at Crescent Jewelers (who ran more of a decentralized credit approval operation than even Friedman’s at this point) were met with protests from sales operations and resistance from the same Freidman executives (Crescent became a subsidiary of Friedman’s in 2006). A persistent sacrificing of best credit business practices and a healthier bottom line gave way to the company acting out of desperation for sales volume. In some instances, a company officer would undermine credit operations and override credit decisions at the behest of store personnel.
In fact, many within sales operations of both companies, beginning at the store level, had convinced themselves that a major cause of sales falloff was a tightening of credit. One analysis, however, provided to an interim CFO regarding this claim at Crescent Jewelers, showed that if the Credit Department had approved every credit deal presented to them, those sales would have only made up 10% against what was a $12 million sales drop year over year at the time. Unfortunately, such information fell of deaf ears and it did not stop sales operations management at the executive level to become myopically focused on credit denials. This sort of irresponsible leadership chose to ignore factors such as an enormous decline in the average sale amount, as well as a noticeable drop in credit limit utilization (which translated to sales associates using less of a consumer's approved credit limit).
This constituted a failure in company leadership as store level excuses dictated how and what sales operation's leadership focused on. Instead of looking internally, sales operations wanted to find a reason for which they felt they had no control over (even though, at least in case of Crescent Jewelers, 85% of the credit approvals happened at store level). This was an echo of the prior Brad Stinn era in how company leadership ignored potential problems with merchandising, marketing and sales abilities, and instead looked to in-house credit as an almost singular reason for the company's failures.
Although some look at Friedman’s as a reason for why a company should not do their own credit, others would point to another national chain, Kay Jewelers, as an example of a company that centralized its credit and collections operations in 1994 and has been very successful.
In spite of what happened at Friedman's and Crescent, in-house credit operations for a business is not something that should necessarily be avoided…it is the influence, input and any participation whatsoever of sales operations in terms of its structure, policies and procedures that needs to be avoided. Unfortunately, Friedman’s Jewelers never had executives or board members that allowed that sort of separation.
Incompetency for corruption
It is largely assumed that Friedman’s 2004 bankruptcy was brought about by internal corruption and lack of business ethics by top executives which led to investigations by the United States Department of Justice and the SEC, and a subsequent delisting from the NYSE.
Many former employees maintain that when Friedman’s emerged from the 2004 bankruptcy after being purchased by hedge fund Harbinger Capital Partners, an era, albeit a short one, of severe incompetency and ineffectual leadership conducted by the new board of directors, company officers, and other key executives resulted in the 2008 bankruptcy, which ended with the liquidation of both Freidman's and Crescent. One early move that was derided by many employees was the decision to move the corporate headquarters (located in a building that Friedman’s owned) from Savannah, GA to Addison, TX.
Other contributing factors that led to the 2008 bankruptcy included (but were by no means limited to): a less than capable IT department, poor merchandising strategies, a debilitating corporate bureaucracy, and inadequate store operational leadership.