Gadzooks - 
now with 377 stores in 37 states
plans to open 50-60 stores in 2001  

 

   

Services
Retail (Apparel)
NASD: GADZ  

Gadzooks, Inc.

4121 International Parkway
Carrollton, TX. 75007
Phone:  972-307-5555

   

   Gerald R. Szczepanski
President and
Chief Executive Officer  

Interview conducted by:
Walter Banks, Co-Publisher

CEOCFOinteriviews.com
February 2001

BIO OF CEO

Jerry Szczepanski is one of the two original founders of Gadzooks Inc.  He has served as the company’s chairman and chief executive officer since its inception in 1983.  Prior to Gadzooks, he spent 7 years as executive vice-president of T-Shirts Plus, a 350-store, $50 million t-shirt retailer.  Prior to that, he was operations manager for 7 years at Johnson Wax.  Mr. Szczepanski is a graduate of the University of Wisconsin and holds a BS in Mathematics and Physics, and an MBA from Marquette University. 

About Gadzooks, Inc.

Gadzooks, Inc. is a high-energy specialty retailer of casual clothing and accessories for teenagers. Dallas-based Gadzooks, has a 207,000-square foot facility in the Dallas area which provides distribution support for all stores. The stores provide an upbeat, entertaining environment designed to make teenagers feel comfortable when shopping.

Gadzooks bases its retailing concept on fulfilling the changing wants and needs of teenagers -- a dynamic demographic group. Today, the number of teenagers is growing at about twice the rate of the overall population. Within five years, teenagers are projected to number about 34 million in the United States. Their spending power is as impressive as their demographic impact, with direct spending in excess of $120 billion and an even greater influence over family spending. What’s more, teenagers spend more on clothing purchases than any other category (including entertainment and food).

Each Gadzooks store offers a broad selection of merchandise from the following five categories: young men’s apparel, junior apparel (for young women), unisex tee shirts, accessories and footwear. The stores operate in what can become a quickly changing environment for teen fashions. As a result, Gadzooks expends considerable effort in keeping up with the needs of its target customers and managing its merchandise mix to meet those needs. The Company regularly participates in focus group activities to stay in touch with its customers.

The Gadzooks’ store model works well in major metropolitan markets, such as Chicago and Atlanta, as well as middle markets like Green Bay, Wisconsin and Longview, Texas.  As of January 29, 2000, the Company’s average store size was approximately 2300 square feet. In fiscal 2000, the Company’s new stores will average about 2700 square feet.

CEOCFOinterviews - Mr.Szczepanski, can you give us a little history of Gadzooks and possibly - where you expect to be three years from now? -

Mr.Szczepanski – “Sure. Historically we are in our eighteenth year. We started in Dallas, Texas in l983 with one store and built our chain slowly for the first six-seven years. In l995 we did a public offering and we have been growing rapidly since. We now have 377 stores in 37 states and are planning on opening 50-60 stores this year. We are currently in every area of the country except the Pacific Northwest and California and we plan to start to go to those areas next year.  We will be entering the Seattle market in June; we will start up there and we will be working the west coast at the end of this year.”

CEOCFOinterviews - Are your storefronts franchises or owned by Gadzooks?

Mr.Szczepanski - “We own all 377 stores. They are all located in regional indoor shopping malls.  We have not yet extended into the strip malls or festival mall centers, but we probably will look at testing something like that in the next couple of years.  Right now, our customers are teenagers and teenagers frequent the malls.  There are a potential of 850 malls that we can put our stores.  We also will try some other shopping venues where we know kids do some shopping.” 

CEOCFOinterviews - Where on the East Coast are your stores located?

Mr.Szczepanski - “We have stores in North Carolina all the way east as you go up the coast.  We are in New York, but not in the City.”

CEOCFOinterviews: - What is your most recent and most exciting news?

Mr.Szczepanski – “We had a pretty rough time a couple of years ago when we changed our merchandize mix, trying something new that did not work. Therefore, over the past two years we have been going back to what worked for the first 16 years.  We were very successful. Earnings are up, sales are up, and everything seems to be going in the right direction. We’ve put the ship on the right course and business is very good.”

CEOCFOinterviews - Please tell us about your vendor relationships.

Mr.Szczepanski – “We have many relationships where we do exclusives with vendors. We have a nice exclusive relationship with Candies, with which we are having lot of success.  We also have a vendor relationship with the Playboy Apparel Division.  Our business generally is a branded business, where we buy brands from the manufacturers and sell them in our stores.”

CEOCFOinterviews - Have you made any acquisitions?

Mr.Szczepanski - “We’ve looked at potential acquisitions over and over, but it always comes back to the fact, that we got 850 potential spots for our business and we don't think at this point that we have to buy another business to expand ours. We can expand our own at a very nice rate that should make our shareholders happy with the growth rate that we have.  As we start running out of locations for us in the next 3-4 years, then we might look at some other things.  But right now we are pretty content opening the model we have and using the resources and the capital and the overhead that we have put in place to operate this business, and use that most effectively by opening our units.”

CEOCFOinterviews - Do you have an Internet site for consumers?

Mr.Szczepanski – “We do not.  Our belief is that the e-commerce section of this business is just something that we should not touch. We don't see the profitability in something like that.  We deal with the teenager and with styles that change very quickly and we don't think that is conducive to e-commerce.”

CEOCFOinterviews - How do you market your storefronts? Do you just put them down and kids show up, or do you have to spend money on advertising?

Mr.Szczepanski – “Your first statement is pretty close. Obviously, by going into a regional shopping center we pay a lot of money to be in the center, and it is really the center's obligation to bring customers into that mall. So the marketing effort that we have is to make sure that when we do go into one these centers, that we build a store that's up to date.  We build a storefront that is enticing to the customer and make sure that when they walk in, our people know how to take care of them and make them want to come back.  This generates long-term customers. Part of our strategy is to open our stores close to the three major selling seasons; Spring brake, Back-to-school and Christmas.  Therefore, we know that most of the people in the area where we are opening will see our store and once they see it, will enjoy what they see and the shopping experience.”

CEOCFOinterviews: - Is your space purchased or leased?

Mr.Szczepanski – “It's a lease situation with major mall developers and they are all long- term leases.”

CEOCFOinterviews – You mentioned that you had a major change in strategy. Obviously there was a little crisis for you and you had to do some crisis management, was there a specific way that you dealt with that?

Mr.Szczepanski – “Yes, it was a crisis. We changed our strategy as far as we were a branded retailer selling brands to our customers for years. We saw many of our competitors doing similar things and as time went on, doing more of what we were doing.  Therefore, we decided to take a different tack and go a different direction, and it was not very successful.  Now you have a crisis, you are not successful; so what do you do, how do you turn around, how do you stop it, how do you go back to where you should be? It took us a good year to do that. Because, not only do you have to switch product but you have to go back and get the original product that you wanted, the brands that you wanted; they change constantly so the turn-around which we thought would be much quicker turned to be a little bit slower, but we learned from it. One thing you learn is - you make a mistake, you fess up to it and you fix it, which is what we did.”

CEOCFOinterviews - Who are your competitors?

Mr.Szczepanski – “It's getting to be a very crowded field. It started out several years ago when we saw the demise of Merry-Go-Around and Chess King and some of the Edison stores. Since that time we have seen the emergence of Old Navy and American Eagle and Abercrombie and Fitch.  One of our big competitors Pacific Sun Wear has added hundreds of stores, and Hot Topic has added hundreds of stores and we are seeing new stores like Hollister and a reasonable competitor in Buckle. If you open the Seventeen magazine - there is a lot of us there.  However, there are plenty of kids out there, too.”

CEOCFOinterviews - How do you maintain your competitive edge?

Mr.Szczepanski – “I think that all of us try to find a niche.  Pacific Sun Wear is kind of a surf niche and Hot Topic has a gothic niche and, I think, American Eagle is little bit more of the preppy, or what we call the plaid niche, and our niche is change. We change as the kids change.”

CEOCFOinterviews - Which area of your business currently produces the greatest revenue?

Mr.Szczepanski – “Our average stores in Texas and Oklahoma are still the largest producers for as per square foot. It has been like that for a long time. Midwest has been very good; actually, every area of the country has been good. We have no complaint as far as consistency. Our stores produce. We started a little slow in the Northeast but we picked that up and the Northeast is producing very well. We added some real key people out there, they have done a great job with it, and they helped us to get where we should be.”

CEOCFOinterviews - Which do you, see as growth areas.

Mr. Szczepanski – “I would guess that we will get more growth in the Northeast and the Midwest and then, hopefully on the West Coast where we are not at maturation.  However, in Texas it will grow a little slower, since we have been here for quite some time.”

CEOCFOinterviews - Do you have the cash and credit to continue your growth?

Me.Szczepanski – “Yes we do. We did a public offering in l995 and we followed it up about nine months later with a secondary. Our business actually generates additional cash every year. We do not deplete our cash or go into any debt situations, or haven't for the last five years and do not anticipate doing that again this year. And I think we try do keep a little powder dry, as they say, and as the business produces cash, it allows us to continue to build stores out of our internal funds. We have a debt facility, we just have not used it.”

CEOCFOinterviews - What is your replenishment rate?

Mr.Szczepanski – “We probably replenish 10-15% additional cash every year and again, that depends on how aggressively we do the store-opening program.”

CEOCFOinterviews - How was Christmas season for you?

Mr.Szczepanski – “Christmas was good, but it could have been better.  Many of our stores closed due to weather in the Midwest and down here in the Southwest and then right at the end of Month up in the Northeast.  Therefore, we were clobbered with the weather a little bit, but it still was a good Christmas.”

CEOCFOintrerviews - Is that something that you can make that up during the spring?

Mr.Szczepanski – “No! I am convinced that you never make Christmas sales up.  However, we did fine and after Christmas we said, that even tough we thought sales could have been little better, the margins were terrific and that helped.”

CEOCFOintervies - Are there any final thoughts that you would like to leave with potential investors and your current shareholders?

Mr.Szczepanski - “I think that the main thing is, that we are over the last couple of years, re-tooled this business, added some real good people, and we have put together a very good executive team.  In addition to that, we will probably end up this year with the operating margin somewhere in the high 6 to 7%.  We have competitors that have operating margins 10-11-12%. We see the path to get there and we are now seeing some of the leverage effects. Our next several years will not be necessarily wrapped around same store sales increases of large proportions, they will be more wrapped around the increasing of the operating margin which to us will make this a real nice story and should make our investors really happy.”