Dead Man Walking: Spiegel Sell-off Begins

“CEO Jack Shea has set some lofty goals for [Spiegel]: ‘$5 billion in ’95,’ he says. Many believe the company will get there. ‘Right now, Spiegel looks really strong,’ says Steven Ashley, vice president and senior analyst at Milwaukee-based investment banking firm Blunt Ellis & Loewi. ‘I can’t think of a single thing about its business that looks weak.’” — Catalog Age, March 1990

Hollywood isn’t the only place where players go from hot to has-been. Downers Grove, IL-based Spiegel Group is a case in point. Fourteen years after its then-CEO had his sights on industry dominance, the multititle mailer has taken several significant steps toward closing its operations.

On April 6, Spiegel agreed to sell substantially all the assets of its Newport News women’s apparel business to Pangea Holdings for $25 million in cash. The sale isn’t a done deal; as the “stalking horse” bid in a bankruptcy court auction, Pangea can be outbid. But by the end of April, which at press time was when the auction was expected to take place, Newport News will likely have a new owner.

Spiegel also announced that it has directed New York-based Miller Buckfire Lewis Ying & Co., which advised on the Newport News deal, to sell its Eddie Bauer catalog/retail unit. And as of mid-April, Spiegel was in negotiations with an unnamed potential buyer for its flagship catalog business.

“Others wonder whether Spiegel can create a strong identity again and rebuild customer loyalty. ‘It will be hard for the catalog to regain a meaningful niche,’ consultant [Herb] Krug says. ‘And it has got to become a strong niche player.’” — Catalog Age, April 1997

In the year since Spiegel filed for Chapter 11 bankruptcy protection on March 17, 2003, observers have floated myriad theories for the company’s troubles: It relied too heavily on extending credit to consumers; its big book had become obsolete in an age of increasing specialization; its merchandise didn’t speak to today’s shoppers; its brand, and that of its Eddie Bauer division, was indistinct.

But the reason for the selling of the titles seems clear: Michael Otto, the German billionaire whose family owns 89% of Spiegel’s shares, failed to negotiate a deal with the company’s creditors to retain control of Spiegel and to settle $1.3 billion worth of legal claims.

In the meantime, Spiegel’s sales have been in freefall. Annual revenue for the company’s three brands tumbled 23%, from $2.3 billion in 2002 to $1.8 billion last year. For the fiscal quarter ended April 3, revenue was $322.4 million, down 22% from $413.6 million for the comparable quarter of 2003. And Spiegel’s fiscal March sales dropped 17%, to $130.2 million from $157.8 million last year.

Despite the overall drop in sales, many believe that Newport News and Eddie Bauer, at least, remain viable properties.

“Eddie Bauer and Newport News don’t require the advertising that a new brand would because they’re well known, have value, and still resonate with consumers,” says Kevin Silverman, managing partner of Chicago-based investment advisory firm Two Rivers Capital Management.

Newport News, with annual sales of about $230 million, will now have “the flexibility to operate unencumbered from a large organization and a situation where you’re operating from bankruptcy,” says George Ittner, the former longtime Newport News president/CEO who most recently has been at the helm of business stationery cataloger Executive Greetings. Newport News “is a very strong brand, which is well recognized and respected in the market,” Ittner says, “and with stable management, it will flourish.” In fact, Spiegel reported that the brand’s March sales and customer response had increased from last year, though it did not provide specifics.

“To [some], it’s Eddie Bauer that’s behind Spiegel’s rebirth. Since purchasing Bauer for $261 million in 1988, Spiegel has rapidly expanded the division… ‘There’s a lot of potential in Eddie Bauer that makes me feel good about the future of Spiegel,’ says consultant Sid Doolittle…” — Catalog Age, June 1993

For more than a decade, the Eddie Bauer division has been considered the star performer of Spiegel Group. During the past few years, however, it’s been a star only in comparison. An outdoor gear marketer turned casualwear apparel cataloger/retailer, Bauer’s mission and brand has grown fuzzy and indistinct since the late 1990s, when the company made the ill-fated decision to expand into “business casual” clothing.

For investors looking at the company, “the perception is that Bauer’s merchandise assortments are very similar to what is already out there in the malls and catalogs,” says Martin Brill, president/CEO of New York-based Sweetwater Apparel Consulting. “There is not enough unique merchandise to support the Eddie Bauer brand as a ‘shopping destination.’ By trying to capitalize on the casual business trend and then going narrow and deep on basics, Bauer lost its image as an authentic supplier of unique outdoor sportswear.”

But that shouldn’t keep a qualified buyer from turning Bauer back into a powerhouse, counters Sid Doolittle, founding partner of the Chicago-based retail consulting firm McMillan Doolittle. “Bauer has vacillated so much on strategic positions over the past few years that it’s lost its way,” Doolittle says. “But it’s repairable. Bauer’s name, reputation, brand, and strategy have respect from consumers. The retail locations aren’t bad. So Bauer will have a lot of value to somebody who knows how to repair or create a new strategy.”

Several observers in the industry believe that Eddie Bauer could sell for close to $1 billion. Still, its sales last year decreased 11% to $1.3 billion, from $1.4 billion in 2002. The company does not break out Eddie Bauer’s sales by division, but estimates that 75% of the business is retail. And according to some sources, only 100-200 of Bauer’s 440 stores are profitable.

A recent statement from Freeport, ME-based cataloger L.L. Bean didn’t polish Bauer’s reputation any. The outdoor gear and apparel mailer, which last year announced that it was exploring the acquisition of Bauer, said in February that it had withdrawn any interest in making a deal, calling Bauer and Spiegel Group’s financial situation “more complex and troublesome than we originally thought.”

Doolittle, for one, doubts that Spiegel’s financial situation is the sole reason that Bean abandoned its pursuit of Bauer. He contends that Bean “isn’t prepared to enter a serious retail enterprise” and says that this isn’t the first time Bean “has ever turned anything [retail-related] down.”

Doolittle thinks that Bauer’s ideal buyer would be a sporting-goods or specialty apparel retailer, such as American Eagle Outfitters. “It has to be someone who knows the retail business,” he says. “Bauer is basically an active sportswear business, and a company that can do a good job building this operation can get it back to where Bauer can be dangerous again.”

“[Chicago-based Barrington Research Associates analyst Debra O’Shea] sees the retention of the big book as a potential problem. ‘I’m not really sold on the big-book concept. Today’s catalog customer expects to see what she wants; she doesn’t want to flip through something that’s that long.’” — Catalog Age, April 1997

Whereas most of those interviewed are sanguine about the future of Newport News and Eddie Bauer, they’re pessimistic about the Spiegel catalog itself. “I don’t see any continuing operation for the catalog unless someone knows what they’re up against and how to fix it,” Doolittle says. He expects the next owner of the Spiegel catalog to grab it solely for the customer file and maybe some inventory “if it’s at the right price. Otherwise, I think it’s a loser, because it’s pretty hard to run a general merchandise catalog business in today’s environment against the competitive forces in the specialty industry. So I see Spiegel as a liquidation.”

But maybe not. At least one report has Pangea, the leading bidder for Newport News, as also interested in buying the Spiegel catalog. Christian Feuer, a principal with Pangea, is no stranger to Spiegel, having been vice president of marketing and advertising production of the Spiegel catalog from 1998 to 2002; before that, he spent four years at Newport News.

And several sources say that the Otto family could still emerge as a potential buyer for Spiegel — or indeed any of the other properties. Buying part or all of the company out of bankruptcy, they say, would free Otto from the $1 billion-plus bank liability and other liabilities such as marginal store leases.
Reporting by Mark Del Franco and Paul Miller

Another Big Book Doing Better

As Spiegel’s woes mount, rival J.C. Penney Co. seems to be turning its once-ailing business around. The Plano, TX-based cataloger/retailer reported that its March direct sales had increased 10%, to $261 million from $238 million last year, exceeding expectations. The company said sales reflect “good results” from specialty catalogs and continued strength in its Internet business, which increased more than 50% for the month. Comparable department store sales for the month jumped 11%. Total Penney sales climbed 11% to $1.6 billion, compared with $1.4 billion last year.

And the company will now have more resources to devote to boosting its retail and direct business. On April 5, Penney agreed to sell its Eckerd drugstore operations to two drugstore chains. Longueuil, Quebec-based Jean Coutu Group is purchasing the Eckerd stores and support facilities in 13 northeastern and mid-Atlantic states for $3.76 billion; CVS Corp. is buying the southern stores and Eckerd’s pharmacy benefits management and mail order businesses for $2.15 billion.

“Our core business has made tremendous progress over the past three years, with significant improvement in both sales and operating profit,” Penney chairman/ CEO Allen Questrom said in a statement, “and we remain confident we will achieve our operating profit goal of 6%-8% of sales in 2005.”

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