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Executive Summary

After two years of testing the water, Revco is diving into the "close-out" consumer goods business by acquiring Odd Lot's entire whsle. retail operations for roughly $113 mil., the chain announced April 20. Revco began its experiment with "close-out" merchandising in January 1982 through a joint venture with Odd Lot. In two years, that venture expanded into a 28-store business in Michigan and Florida. Under that agreement, Revco handled retail sales while purchasing merchandise from Odd Lot's whsle. subsidiary Tangible. Noting that the gross margins in this business are higher than in Revco's drug store operations, the chain characterized the joint venture in its most recent annual report for fiscal 1983 as its "most promising diversification activity." The acquisition agreement calls for Revco to issue 4.4 mil. shares, with a market value of $113 mil. at 25-3/4 per share at the end of trading on April 20, to the current owners of close-held Odd Lot. Revco said that the merger should be completed by June 2 fiscal year end. At that price, Revco is paying roughly ten times earnings and .89 times sales for Odd Lot's Tangible whsle. business and its 58 retail outlets in Metropolitan New York, New Jersey, Pennsylvania, and Connecticut. In its last fiscal year ended Jan. 31, Odd Lot had net earnings of $11.3 mil. on sales of $127 mil. -- with Tangible accounting for 61% (or $78 mil.) Revco noted that it accounted for $42 mil. of Tangible's sales last year. Kidder Peabody is handling the acquisition. By comparison Odd Lot stores sell a "broad and continually changing variety of non-apparel consumer goods consisting of manufacturers' overruns, close-outs and discontinued name-brand merchandise at substantial discounts from normal retail prices," Revco said. Describing Tangible's business, Revco said that the whslr. sells "a broad range of name-brand merchandise to retail chains and other mass merchandisers in the U.S. and abroad, at prices substantially below whsle. cost." Revco noted that most of the whslr.'s inventory is acquired "in negotiated purchases from consumer goods mfrs., whslrs., retailers and financially distressed businesses." The Odd Lot purchase "is a logical diversification move because its business is closely related and complementary to our drugstore business," Revco President Sidney Dworkin commented. The chain has announced it "expects to convert certain marginal drug stores to Odd Lot operations." The Odd Lot acquisition provides Revco with a balanced entry into "deep" discounting -- with both retailing and wholesaling. Dworkin said that Odd Lot should add approximately 60 new stores during Revco's upcoming fiscal year ending in May 1985, "which would expand the chain to nearly 150 stores." Revco said that it plans to carry on "an aggressive new store opening program" for Odd Lot.

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