What's in store for Belk

The nation’s largest privately owned department-store chain
goes up against a weak economy and discounters’ strength.
By Lisa Davis

A ponytailed, 30-year-old bank worker, who has slipped into the Belk store at Northlake Mall on her lunch hour, peruses racks of summer wear in the juniors department, pulling out shorts and blouses. Nearby, a maze of counters offers glosses and shines from cosmetics lines such as MAC and Lancôme. Signs featuring the smiling face of Kristin Davis, the South Carolina-reared Sex and the City star, tout her new Belk clothing line. This store caters to north Charlotte’s burgeoning University City. It has tables piled with Lucky jeans, a large Liz Claiborne section and a packed home department featuring Belk’s own Biltmore brand luggage and china. But what many shoppers are here for, as summer winds down and the fall season gears up, are the sales. A woman with a toddler pacing around her legs pokes through shoeboxes stacked two high on red-draped sales tables.

Another wanders through the racks searching for slacks. Martha Honeycutt, 63, says she goes way back with the retailer. “My first job was at Southern Bell downtown, and I would walk to Belk’s to shop. I got my first charge card there.” These days, Belk is the only department store she goes to. Otherwise, she shops at discounters such as Marshalls.

The Charlotte-based chain is trying to hold on to customers like Honeycutt in what’s been a tough year for many retailers, including Belk Inc. Sales are down, but it hasn’t lost sight of its long-term goals. The nation’s largest privately held department-store chain wants to get bigger. It has opened eight stores this year, from Florida to Oklahoma, and has expanded and renovated six others. It’s filling in and pushing at the edges of a home turf bolstered by two major acquisitions — the Parisian and Proffitt’s/McRae’s chains — in the past three years.

For the third generation to run the family business, it’s familiar ground. The Belks have been operating Southern department stores since William Henry Belk set out a shingle in Monroe 120 years ago to sell overalls and boots to farmers and calico to their wives. “We know how to operate — and operate well — a smaller store,” H.W. McKay Belk says. “It’s part of our history, our DNA, that understanding.” That DNA stiffens the Belks’ spines as they try to fend off Kohl’s, Target and all the other national chains vying for sales in their markets. By getting bigger, the retailer hopes to strengthen its presence in key markets and amass enough economies of scale to keep its costs low and its prices competitive.

The strategy has been long in the making. Before Belk could even consider bulking up, it had to break down barriers that had long hindered its growth. It has settled family disputes, simplified its convoluted ownership structure and modernized operations. “It had a reputation a while ago of being backward and not being the most sophisticated retailer,” says Barton Weitz, executive director of the University of Florida’s David F. Miller Center for Retailing Education and Research. “Now people view it as an up-and-coming retailer. … It’s sort of a rising star.”

But hazards remain that could knock the ambitious chain off course. The shaky economy could force Belk to retrench, as shoppers flee to discount stores. Like all department stores, it will have to find a way to escape the confines of aging malls and secure its niche between low-price superstores and trendy boutiques buffeting it from both sides. Perhaps more important for Belk, now a 314-store chain with $3.8 billion in sales from the Dallas suburbs to Wilmington, will be figuring out a way to maintain the local touch — the feel for its small-town markets — that made its name.

Last fall, the Belk logo went up on 25 former Parisian stores, capping a two-year flurry of acquisitions that boosted revenue $1.2 billion. It started in 2005 with the $622 million purchase of 22 Proffitt’s and 25 McRae’s stores from Birmingham, Ala.-based Saks Inc. Just over a year later, Saks put its Parisian chain on the block, and Belk picked it up for $315 million.

Between those buys, Belk paid $19 million for Ridgeline, Miss.-based Migerobe Inc., which ran fine-jewelry counters in some Belk stores. It stopped leasing out its jewelry departments and began running its own Belk and Co. Fine Jewelers in 150 stores. This fall, Belk launched a new, expanded Web site, which is expected to offer 100,000 items by year’s end.

What the new stores brought was a way to fill in its footprint. Belk stores had dotted the map as far west as Texas but were con- centrated along the East Coast from north Florida to Virginia. Proffitt’s and McRae’s brought dominant market shares in Tennessee and Mississippi; Parisian boosted Belk in Alabama. The acquisitions, particularly Parisian, also put Belk stores in upscale shopping centers in Atlanta, Nashville and other big markets. Adding them to its own handful of high-end stores — including ones in Raleigh, Charlotte and Jacksonville, Fla. — the company had enough to create a new class of Belks to grab a bite of the lucrative luxury market.

A typical small-town Belk offers packed racks of moderately priced clothes, makeup, jewelry and home accessories, both private-label and some well-known national brands such as Estée Lauder and Liz Claiborne. In its big-city stores, Belk has added some of the sheen of its ritzy SouthPark mall store in Charlotte — more fashion brands and services such as personal shoppers, who offer advice and undivided attention to customers.

But just as Belk moves upscale, consumers are ratcheting down. With credit tight and the economy wilting, they are looking to rein in spending. That’s creating tough times for many department stores, which have seen sales drop and margins pummeled. Belk is feeling the pain. Its revenue fell 7.7% in the six months that ended in August, and net income dropped by nearly 22%. Comparable-store sales — a key measure of retail performance — slumped 6.4%. Belk is girding to withstand the downturn by cutting costs and slowing expansion. “We are watching capital closely, watching expenses closely,” Executive Vice President Steve Pernotto says. “In the second quarter, with a sales decline, our margins improved, so we clearly have reduced the amount of inventory we carry.”

The family members steering the chain through these hazardous economic shoals are three grandsons of William Henry Belk: Thomas M. “Tim” Jr., chairman and CEO; McKay, president and chief merchandising officer; and John R. “Johnny,” president and chief operating officer. The three, sons of former President Thomas M. Belk, were groomed for leadership. The first generation of Belks armed with MBAs, the brothers moved up the management ranks through the ’80s and early ’90s. When their father died in 1997, they became co-presidents, working under the watchful eye of their uncle John, Belk’s CEO. After his retirement in 2004, the brothers assumed their current roles.

When the three gather to talk about Belk at its Charlotte headquarters, they are quick to defer to one another and to point out the others’ accomplishments. “Dad’s been gone for 10 years,” Tim, 53, says, “but one of the things we take away from him is sticking together. He was a big proponent of teamwork, and that is one thing we’ve worked hard on.” The brothers present a harmonious and united front. “It’s like a marriage in some ways. You have to work at it.”

“They have defined roles based on their skills and abilities,” says John Lassiter, president of Charlotte-based Carolina Legal Staffing and a former Belk executive. “And they seldom make important decisions without all three of them being in agreement.” They grew up watching their father and uncle battle their siblings and partners over the direction of the company. “They have seen what worked and what didn’t work, and it has strengthened their resolve to work together.”

When he died at age 89 in 1952, William Henry left controlling interest in the myriad partnerships that ran Belk stores to his daughter and five sons. They soon clashed, leading to William Henry Jr.’s ouster and John taking control.

John ran Belk for 50 years (with brother Tom by his side for most of them), often it seems by sheer force of personality. The current generation of leaders may never cut the broad swath across Charlotte that their uncle did. Colorful, often controversial, he was one of the city’s longest-serving mayors, known for helping rejuvenate downtown, keeping the city calm during the turbulent civil-rights era and the occasional oddball comment. Why put the airport on the city’s beleaguered west side, already home of landfills, fuel-tank farms and interstate highways? “Because that’s where the airplanes land.” He became Davidson College’s biggest individual donor by funding a $28 million scholarship program but later publicly broke with his Presbyterian alma mater when it opened its board of trustees to non-Christians.

At Belk, he had to come to grips with an unwieldy array of corporations and partnerships — at one point more than 350. That was a legacy of the way his father had expanded his business. As he entered new towns, William Henry took on local partners who added their names to the logo — Belk Matthews, Belk Hudson, Belk Simpson — and brought a deep knowledge of the markets they were selling to. That formula worked for years, but eventually Belk’s ownership labyrinth began to hinder the business. Occasional tensions and even court fights among family members and store partners stymied the organization’s attempts to modernize.

After years of slowly consolidating ownership, Belk finished the job in 1998 when it rolled the remaining 112 corporations into one. It was a complex task that involved determining a valuation for each company that every shareholder would find equitable and approve. Once the shareholders signed off, the companies were combined into a single entity and the papers shipped to the Securities and Exchange Commission. Although still privately held, Belk has enough shareholders — between 800 and 900 — to require it to regularly report financial data to the SEC. Ownership is concentrated among the families of John, who died last year, and Tom and their sister, Sarah Belk Gambrell.

Aside from a cousin managing a store, Tim, McKay and Johnny are the only family members working at Belk. Their sister, Katherine Belk Morris, and cousin Mary Claudia Belk Pilon, John’s daughter, serve on the board of the charitable Belk Foundation.

Though ownership was finally streamlined, operations were not. The company lumbered along with 13 operating divisions and various distribution centers, a few within 100 miles of one another. It was a crazy quilt of marketing, merchandising and distribution. Rectifying that would make the corporate rollup seem like a breeze.

Trucks back up to bays to disgorge boxes into a large warehouse. The boxes, which come from vendors filled with sales-tagged, rack-ready merchandise, snake along more than five miles of conveyor belt to another truck that carries them to stores. Most are only touched twice, once when they are heaved onto the conveyor and once when they are taken off, seven minutes later. Since Belk built the 371,000-square-foot distribution center in Blythewood, S.C., eight years ago, cycle time of merchandise from vendor to retail floor has shrunk from 21 days to eight. “That’s huge for our business,” Executive Vice President James L. Harvey says. “We can sell for full price 13 days longer before markdown.”

Belk started making plans soon after the corporate rollup for a major distribution center that would consolidate more than 100 points of distribution into one. (Belk would later add a center in Mississippi and one for Web purchases in Charlotte.) But it kept the plans confidential for as long as it could. The building rising amid a patch of pines was known — to the chagrin of a few vendors wandering around the Interstate 77 exit trying to find it — simply as “Project Harvey,” after James Harvey, who shepherded the effort.

Change never comes easy, but to a company that reveres its traditions as much as Belk does, it was wrenching. “The rollup didn’t affect people like the consolidation of merchandising and marketing did. That was their day-to-day jobs,” Tim says. “That was probably the most difficult, the biggest step.” The chain reduced its divisions from 13 to four, and in 2002, it pulled marketing and merchandising decisions into headquarters. It also updated its compensation system, which put more stock in the hands of key managers. As it streamlined, Belk cut 260 jobs, then was hit with a flurry of age-discrimination lawsuits, which it settled. It emerged from the reorganization leaner and more flexible. The question soon became whether it could handle its next transformation. “The timing was really not of our choosing,” Tim says. When Saks put its Proffitt’s/McRae’s division up for sale in 2005, “we had to decide, are we ready for this kind of growth?”

Proffitt’s and McRae’s stores offered moderately priced merchandise to a small-town Southern demographic similar to Belk’s in markets Belk wanted to be in. “We felt like things were going really well,” Tim says. “We were ready to raise our hand to begin negotiations.” After the acquisition, the company spruced up the stores with new signs and displays and added more fashion brands and merchandise that appeals to younger customers. It celebrated the reopenings with lots of fanfare and special promotions. For Coleman Piper, who retired in 1999 after more than 25 years at Proffitt’s and now teaches retail at the University of Tennessee Knoxville, it was painful seeing the Proffitt’s name disappear. Still, he knows how tricky these transitions can be and says Belk has seemed to handle it well. “Belk cut their teeth on the small town. That’s what they know.”

It was still grappling with all the hurdles — integrating systems, standardizing procedures, tailoring assortments — from its first major acquisition when it made its second. Just over a year after acquiring Proffitt’s/McRae’s, Belk bought Parisian. The acquisition further strained the company’s resources, but it was a deal Belk couldn’t pass up. “It was an economy-of-scale move at least in part,” says Robert A. Robicheaux, chairman of the Department of Marketing and Industrial Distribution at the University of Alabama at Birmingham. “But it was also a recognition that there was a great retailer up for sale at a great price. … It was a good buy for Belk.”

But one thing Belk got with its acquisitions was lots of mall stores. Nearly all the former Parisians are in malls. The problem is, traipsing down their long corridors is not the way people want to shop anymore, says Charleston, S.C.-based America’s Research Group Chairman C. Britt Beemer, who conducts retail surveys. “My concern is simply the fact that mall traffic is down by at least 30%, if not more, over the last five years. I just don’t see how you can be a mall-based retailer and be able to survive in the long term.” That’s been Macy’s problem, he says, since it acquired the parent company of Hecht’s and other chains in 2005. “They bought May [Department Stores] Co. at a time when mall traffic was beginning to wane. They’ve never been able to build up the comparable-store sales.”

Belk knows about mall troubles. Last year, it closed a store it had run for more than 30 years at Charlotte’s Eastland Mall, which has deteriorated so much its owner may soon walk away from it. Half of Belk’s stores are in malls, about the same percentage as before its acquisitions. The company has offset the influx by building stores in places such as trendy “lifestyle” centers, open-air malls where customers can stroll from store to gelato shop to multiplex. And malls or no, Parisian offered good locations in cities such as Atlanta, Tim says, where the acquisition “gave us a presence inside the beltway we didn’t have before. It gives us a much stronger market position and advertising base, a way to serve customers in that market.”

Parisian was known for its more chic apparel and wide array of women’s shoes. For many consumers in its markets, the name resonated upscale — not a word they associated with Belk. Soon after the sale, Bayer Properties, which owns The Summit, the Birmingham shopping center housing one of Parisian’s finest stores, filed suit to prevent Belk from replacing the Parisian with one of its own. Belk stores, the lawsuit said, are not “first-class retail fashion department stores.”

The transition wasn’t going to be easy. The Belk brothers considered keeping the Parisian name on its stores. “We debated it long and hard because it is a great franchise with a lot of customer following and loyalty,” Johnny, 49, says. But creating a separate division “was adding complexity we didn’t want to have.”

So Belk set to work blending the two franchises. “It’s a rare opportunity,” McKay, 51, says, “to be able to open the hood of your competition and see what’s working and be able to take those ideas and process them.” Belk brought in senior management from Parisian — including the head of its shoe business, David Neri, whom Belk named executive vice president and charged with revamping its shoe departments. Belk bolstered its merchandise mix with higher-end brands and expanded training of its salespeople to match Parisian’s emphasis on service.

Belk also started renovating stores and adding home departments, which Parisian had not offered. And it launched a public campaign to win over Parisian loyalists. “Belk has done an awful lot of promotion, an extraordinary high volume of advertising,” Robicheaux says, “to introduce itself, its brand and its strategic market position to the consumers in the old Parisian trading areas.” The Belk brothers have gone to Birmingham several times to give speeches, mingle in the community and make their case.

The Summit store in Birmingham got a $13 million refurbishing that added 50,000 square feet of selling space. And Belk has designated the store one of its five flagships — joining upscale locations at SouthPark mall in Charlotte and Crabtree Valley Mall in Raleigh and the former Parisians at Phipps Plaza in Atlanta and at CoolSprings Galleria in Nashville. Satisfied that Belk wasn’t going to inflict a mass-market department store on its luxury shopping center, Bayer agreed to settle its suit.

The company faced resistance from some of the customers it ardently pursued. A few months after the sale, a mention on a newspaper blog about the chain’s plans for a Knoxville, Tenn., Parisian prompted a torrent of responses from customers still unhappy about the conversion of a local Proffitt’s to Belk. One complained that “the store is too small with no selection and is way too crowded.” Another called it “Kohl’s Light.” Weitz wonders if Belk has an identity problem. It is both big-city and small-town — and runs both kinds of stores under the same brand name. “I think it creates a challenge for Belk in developing a consistent image of what they offer.”

For Belk, it’s a simple matter of going where the growth is and tailoring the merchandise to its markets. “We are pretty consistent in how we treat our customers,” Pernotto says. As it expands, he adds, Belk is focusing mostly on medium-sized communities, not big metro areas. “We will have stores of 80,000 [to] 100,000 square feet in towns of about the same population.”

Since 2003, Belk has added four outsiders to its board of directors, including National Gypsum Co. CEO Thomas C. Nelson and John L. Townsend III, a former partner at Goldman Sachs & Co. It’s also been expanding its management ranks not only with the Parisian executives who now fill key roles, but also from competitors. “This is a much more outward-looking organization,” Lassiter says, “and in part it is generational.” Belk hadn’t been completely insular — John Belk had taken advice and hired from outside the company — but the new generation has flung open the window wider. It’s had to as the chain has ramped up its size and reach.

What hasn’t changed — and likely won’t, at least in the near term — is Belk’s status as a private company. The brothers have talked about taking it public, Tim says. “We haven’t ruled it out, but we have a decided preference to remain private.” Without the pressure for quarterly results, Belk can make strategic investments for the long term, he adds. “As long as we can fund our growth, we see more advantages to being private.”

More acquisitions are not part of the growth plan for now, Tim says. “At this point we have invested a lot of additional capital, and we are focused on getting a return on that.” But as the company fills in its footprint across the South and pushes westward, Weitz predicts Belk will eventually pony up for more. “I wouldn’t be surprised if Belk tried to acquire another company. To be efficient, you have to become larger.”

The department-store chain that the Belk brothers run looks different from the one they inherited. And it’s likely to keep changing to keep up with its competitors. “The nephews are like their uncle and their father,” Harvey says. “They believe in heritage. And they believe in leaving it better and bigger.”