After 1999 and 2000 Financial Results Exceed Business Plan Targets,
  Disappointing 2001 Results in Post-September 11 Economy Preclude Business
                 Reorganization and Emergence From Chapter 11

    Company and Creditors Agree Consensual Wind-Down in Stakeholders' Best
       Interests; Going-Out-of-Business Sales Scheduled to Commence On
        January 19, 2002 at More Than 200 Stores in 32 States Subject
                         To Bankruptcy Court Approval

     Company Cancels Vendor Orders and Implements 50% Reduction in Force
  In Corporate, Distribution and Sales Support Functions; Employee Severance
     Payments to Be Paid in Accordance With Prior Bankruptcy Court Orders

  Company Plans to Complete Principal Asset Dispositions and to File Plan Of
  Liquidation by September 2002; Plans Initial Distribution to Creditors By
         Year-End; No Distribution to Be Made to Common Stockholders

    NASHVILLE, Tenn., Jan. 4 /PRNewswire/ -- Service Merchandise Company, Inc.
(OTC Bulletin Board: SVCDQ) today announced that it will cease continuing
business operations, beginning with the commencement of going-out-of-business
sales at more than 200 stores in 32 states on January 19, 2002, subject to
approval of the United States Bankruptcy Court for the Middle District of
Tennessee.  The Company said that its business plan performance exceeded
expectations in the prior two years but disappointing 2001 financial results
primarily attributable to the combined effects of the events of September 11,
the resulting loss of consumer confidence and the soft economy generally
weakened the Company's financial and liquidity position and precluded the
Company from completing its planned business reorganization and emergence from
Chapter 11.
    Service Merchandise said it intends to file a plan of liquidation by
September 30, 2002 to provide for the distribution of the proceeds of its
assets to creditors, and it will seek an extension of its exclusive periods in
which to file and solicit acceptances for a plan to accommodate its decision
to wind down its operations.  The Company said that it plans an initial
distribution to its creditors by year-end 2002 and expects that shareholders
will not receive any distribution on account of their common stock.
    Chairman and Chief Executive Officer Sam Cusano stated, "Since 1998, when
Service transitioned from being a catalog showroom to a speciality retailer
focusing on fine jewelry, gifts and home decor products, our associates have
performed extremely well even under the most adverse conditions.  With the
continuing support of our lenders, statutory creditors' committee and vendors
throughout our Chapter 11 cases, we put into place all of the marketing,
merchandising, real estate and other elements for successful emergence from
our reorganization cases.  However, given the extraordinarily poor retail
economy this past year, especially for jewelry retailers, our Company's
prospects for successfully reorganizing were compromised to the point that we
and our creditors consensually concluded that winding down the business and
distributing the substantial value of our inventory, real estate and other
assets to our creditors was in their best interest.  While we wish the final
result could have been otherwise, our foremost goal throughout the cases has
been to maximize value for our stakeholders and we are doing so through this
course of action."
    In connection with today's announcement, Service Merchandise has taken
several steps to preserve value for its creditors including the cancellation
of vendor orders and the implementation immediately and during the remainder
of January of a 50 percent reduction in force, or approximately 500 of the
1,005 employees in the Company's corporate, distribution and sales support
functions.  Approximately 8,300 store employees (including both full-time and
part-time employees) will continue through the completion of the GOB sales
later this Spring and the Company's remaining employees have staggered
departure dates through year-end.  The Company said that employee severance
and other benefit payments would be paid in accordance with prior orders of
the Bankruptcy Court.  The wind-down will also include the disposition of the
Company's real estate portfolio consisting of approximately 70 fee-owned
properties and 150 unexpired leaseholds.
    For more than 40 years, Service Merchandise has offered a dominant
selection of quality jewelry and products for the home at affordable prices.
During the 1970s, the Company innovated the retail industry by becoming the
nation's top catalog-showroom retailer.  At its peak, Service Merchandise
achieved more than $4 billion in annual sales.  In recent years, however, the
Company's financial performance deteriorated.  The Company responded with a
series of restructuring plans, starting in 1997.  While it was in the process
of revitalizing its retail format, a small group of creditors filed an
involuntary petition under Chapter 11 of the Bankruptcy Code on March 15, 1999
seeking court supervision of the Company's restructuring activities.  The
Company filed a voluntary Chapter 11 petition on March 27, 1999 and management
immediately implemented the 1999 Stabilization Plan, whereby the Company
successfully improved vendor relations and otherwise stabilized its business.
Between 1999 and today, the Company downsized both its stores and its employee
base, reducing from approximately 350 stores to 216 and approximately
41,000 employees to approximately 9,300.  In February 2000, Service
Merchandise announced its 2000 Business Plan, which refocused its core product
lines and rationalized its real estate to better accommodate its core jewelry
and home assortments.  The Company discontinued unprofitable product lines
such as electronics, toys and sporting goods and developed a strategic
subleasing program through which it subleased approximately half the square
footage of many of its ongoing stores to unlock the inherent value in unused
portions of those retail locations.  In January 2001, the Company continued to
refine its business model in an effort to achieve a timely emergence from
Chapter 11 during the first quarter of 2002.
    The combined effects of the events of September 11, 2001, the resulting
loss of consumer confidence and the resulting soft retail economy, however,
prevented the Company from completing its planned business reorganization and
emergence from Chapter 11.  Fleet Retail Finance President Ward K. Mooney
noted, "The Company's management had made significant strides in reorganizing
its business and Fleet was prepared to support Service Merchandise's
reorganization and emergence from Chapter 11.  While the softness in 2001
financial performance has resulted in the Company ceasing continuing
operations and working toward distributing the value of its assets to its
creditors, Fleet continues to look forward to working with the Company in
completing the wind-down of the estate consistent with the agreements between
the Company and its lenders."  Separately, the Company said that Fleet and
Service Merchandise were negotiating waivers and amendments to the Company's
DIP financing agreements to facilitate funding of the Company's wind-down
operations during 2002.
    Glenn Rice of Otterbourg, Steindler, Houston and Rosen, lead counsel for
the Official Committee of Unsecured Creditors, advised that the Committee
supports the Company's decision to wind down its business operations.
"Service Merchandise has worked closely with its creditors throughout its
reorganization cases including during recent weeks, and the Committee concurs
that under present circumstances it is in the best interests of all creditors
that the Company cease continuing operations in light of the current difficult
and unstable, weakened post-attack retail economy.  The Committee has
supported management throughout its reorganization efforts and believes that
the Company will continue to take the appropriate steps to maximize the value
of its considerable assets and promptly distribute them to creditors by
year-end," Mr. Rice said.
    The Company said that existing common shareholders will not receive any
distribution under the anticipated plan of liquidation.
    The Bankruptcy Court has scheduled a hearing for January 18, 2002, at
which the Company intends to ask the Bankruptcy Court to approve various forms
of relief related to the wind-down of the business, including (a) the proposed
conduct of the going-out-of-business sales and the Company's selection of a
consultant to assist with such sales; (b) the retention of an inventory
consultant for the Company; (c) a retention program for the Company's
remaining employees; (d) the rejection of certain executory contracts that are
no longer necessary to the Company, including procedures for the rejection of
such contracts in the future; (e) procedures for the disposition of certain de
minimis assets; (f) the extension of the deadline for the Company to assume or
reject certain unexpired leases; (g) the extension of the Company's exclusive
periods within which to file and solicit acceptances of a plan and (h) the
termination of the stay of certain avoidance actions previously asserted by
the Company.

    Service Merchandise, a specialty retailer focusing on fine jewelry, gifts
and home decor products, has recently operated 218 stores in 32 states and
employed approximately 9,300.

    This release includes certain forward-looking statements (any statement
other than those made solely with respect to historical fact) based upon
management's beliefs, as well as assumptions made by and data currently
available to management.  This information has been, or in the future may be,
included in reliance on the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.  These forward-looking statements are based on
a variety of assumptions that may not be realized and are subject to
significant business, economic, judicial and competitive uncertainties and
potential contingencies, including those set forth below, many of which are
beyond the Company's control.  Actual results may differ materially from those
anticipated in any such forward-looking statements.  The Company undertakes no
obligation to update or revise any such forward-looking statements.  The
forward-looking statements, the Company's liquidity, capital resources and
results of operations, and the results of the Company's planned liquidation
and related distributions are subject to a number of risks and uncertainties
including, but not limited to, the following:  matters affecting the timing
and amounts of anticipated distributions to creditors, the ability of the
Company to successfully conduct GOB sales, maximize asset value and control
expenses; the ability of the Company to comply with the terms of the DIP to
Exit Facility; the ability of the Company to reduce its workforce and related
expenses and to achieve anticipated cost savings; potential adverse
developments with respect to the Company's liquidity or results of operations;
competitive pressures from other retailers, including specialty retailers and
discount stores, which may affect the effectiveness of the planned
liquidation; trends in the economy as a whole which may affect consumer
confidence and consumer demand for the types of goods sold by the Company; the
seasonal nature of the Company's business; the ability of the Company to
attract, retain and compensate key executives and associates; the ability of
the Company to attract and retain customers and potential adverse publicity;
and real estate occupancy and development costs, including the substantial
fixed investment costs associated with opening, maintaining or closing a
Company store.

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