February 11, 1998


Mr. James E. Poole
Poole Enterprises, Inc.
4701 Trousdale Road
Nashville, Tennessee 37220

Dear Mr. Poole:

     Service  Merchandise,  Inc. (the "Company") is pleased to confirm the terms
pursuant  to which  you have  agreed  to serve as  Chairman  of the Board of the
Company as hereinafter set forth:

     1.  Title;  Duties.  Effective  January  29,  1998,  you have been  elected
Chairman of the Board of the Company.  As Chairman,  the Board has  delegated to
you the responsibility of interfacing  between the Board and the officers of the
Company,  to provide a conduit to the Board, and to provide counsel to the Chief
Executive  Officer.  You will determine,  in your sole  discretion,  how to best
perform  these duties and the time  necessary to  satisfactorily  fulfill  these
responsibilities.

     2.  Additional  Compensation.  So long as you  serve  in your  capacity  as
Chairman of the Board,  you shall receive as additional  compensation the sum of
$10,000 per month.  Such  compensation  shall be in addition to the compensation
paid to each  nonemployee  director.  You shall  continue to  participate in the
Directors'  Equity Plan for nonemployee  directors and shall  participate in any
other benefits generally available to nonemployee directors.

     3. Death and Other Benefits.  In recognition of the  expectation  that your
service as Chairman of the Board will continue for a period of not less than two
years, and of the additional  duties and time commitments  imposed upon you, the
Company agrees that in the event of your death or total disability while serving
as Chairman  of the Board or your  removal as Chairman of the Board by action of
the Board, the Company will pay to your estate, or you in the case of a removal,
an amount  equal to $240,000  less the total amount of  additional  compensation
previously paid to you.

     4. Office and  Secretarial  Assistance.  The Company  agrees to provide you
with an office at its  principal  office  and to  provide  you with  secretarial
assistance  satisfactory  to you to  assist  you in  performing  your  duties as
Chairman of the Board.


     5.  Expense  Reimbursement.  The Company  agrees to  reimburse  you for all
reasonable expenses,  including a car allowance of $1,000 per month, incurred in
connection with the performance of your duties as Chairman of the Board.

     6.   Indemnification   Agreement.   The  Company   has   entered   into  an
Indemnification  Agreement  with you in your  capacity as a director  and hereby
reaffirms its obligations thereunder and confirms that the agreement shall cover
any matter giving rise to indemnification  thereunder arising out of your duties
as Chairman of the Board.

     Please  confirm  your  acceptance  of the terms  pursuant to which you will
serve as  Chairman  of the Board by signing  and  returning  to the  Company the
enclosed copy of this letter.

                                                Very truly yours,

                                                SERVICE MERCHANDISE, INC.



                                                By:/s/ Gary M. Witkin
                                                       -------------------
                                                       Gary M. Witkin
                                                       President and Chief
                                                       Executive Officer


Confirmed and agreed:


/s/ James E. Poole Jr.
- ----------------------
James E. Poole, Jr.