A New Catalog King Waiting In The Wings?

What's bad for Sears is, well, good for Service Merchandise, a major catalog showroom merchandiser that operates a chain of about 385 stores in 36 states. With Sears Roebuck bailing out of its 97-year-old general-merchandise catalog business, some big money runners are betting that Sears' loss will be Service Merchandise's significant gain. So they have started snapping up the smaller retailer's shares, now at 15.

"There's no doubt that a big part of Sears' army of faithful catalog customers will move their business to Service Merchandise's catalogs," argues Bill Harnisch, president of Forstmann-Leff Associates, a New York investment firm that has accumulated a stake of more than 10% in Service Merchandise. Harnisch believes the company is a "sleeper" in the otherwise mature group of catalog-merchandise retailers. Service Merchandise promotes its wares through a 540-page catalog mailed out every autumn and through smaller catalogs issued during the Christmas and spring seasons. The store offers a wide variety of products--from jewelry, diamonds, and housewares to home electronics, sporting goods, and lawn and garden tools.

But Sears' exit from the catalog business isn't the only reason that Harnisch is hot on Service Merchandise, even though the company reported flat fourth-quarter earnings on a 13% rise in sales. The company explains the flat earnings resulted from increased sales of goods that were aggressively discounted in price, thus narrowing profit margins. Earnings for all of 1992 rose to 83 a share from 76 in the prior year. Sales increased to $3.7 billion from 1991's $3.3 billion. The results were below analysts' expectations.

HOLIDAY HELPER. The fourth quarter is very critical because catalogs are a highly seasonal business. Historically, the company posts a loss in the first nine months. The bulk of its business comes during the Christmas rush, which determines whether the whole year is up or down.

Even so, Harnisch says he remains bullish on the stock. He believes the company will get back on track in its expansion plans this year because of the improving economy and the company's plan to restructure its debt. The debt refinancing, he says, will free up a lot of cash as it will cut interest payments.

Harnisch expects the company to accelerate its growth plans after the debt restructuring. He sees earnings rising to between $1.20 a share and $1.50 this year. He believes the stock will hit the 20s over the next 12 months.

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