Fingerhut’s Fate

Federated Department Stores’ decision to rid itself of its Fingerhut subsidiary didn’t surprise most industry observers. After all, Federated had been reevaluating its ownership of Minnetonka, MN-based Fingerhut since 2000, little more than a year after its March 1999 acquisition of the low-end general merchandise cataloger.

But what did stun observers was the $18.4 billion Federated’s announcement on Jan. 16 that it would close the $690 million Fingerhut title before the end of the year.

“I’m surprised that Federated hasn’t tried to shop the business more — or maybe it has and couldn’t get what it wanted,” says Jim Adams, managing director of Boston-based investment bank Ulin & Holland. “But with the names, the systems, the infrastructure, as well as Fingerhut’s legacy, I’m shocked.”

Federated is aggressively seeking buyers for several catalogs that operate as Fingerhut subsidiaries, including apparel books Arizona Mail Order, Bedford Fair, Lew Magram, and Brownstone Studio; food gifts catalog Figi’s; and general merchant Popular Club Plan. Together, these books account for about $510 million in sales. The company plans to continue operating these titles until they are sold.

And just days after Federated stated its intent to close Fingerhut, several investor groups said they were looking into buying Fingerhut. Business Development Group (BDG), a turnaround company based in Wayzata, MN, is one of the potential Fingerhut suitors.

“We think it is a great company,” says BDG partner Marshall Masko, a former senior vice president with now-defunct multititle mailer CML Group. “Since the company has been profitable in the past, there’s no reason to believe that it can’t be profitable again. Fundamentally, the business is quite sound. With some right-sizing or tweaking of the business model, this is an economically viable company.”

Veteran retailer Tom Petters, chairman of Eden Prairie, MN-based RedtagBiz, is heading up another group of investors interested in purchasing Fingerhut. Petters says that, having signed a confidentiality agreement with Credit Suisse First Boston, the investment bank that represents Federated, he was unable to comment.

By the end of January, two more potential buyers were said to be interested: a group led by Minneapolis businessman Paul Ellarby and New York-based KPS Special Situations Fund. But Federated doesn’t appear to be banking on a sale. “Should a buyer emerge, we’ll be prepared,” says spokesperson Carol Sanger. “But that’s not something we think is likely.”

So as of late January, what may well be the last Fingerhut catalog was in the mail, and about 2,300 of Fingerhut’s 6,000 employees had received their Worker Adjustment and Retraining Notifications (WARN), the layoff notices federally mandated of large companies. The first layoffs could occur at the end of this month.

The changing value of the back end

In the current economic climate, Federated may have more to gain by closing the business than trying to sell it. The company would generate an estimated $1.1 billion-$1.3 billion of after-tax cash proceeds (net of one-time costs) during the next four years from the disposition and monetization of Fingerhut’s assets.

As for how much Federated could expect to sell Fingerhut for, former Fingerhut vice chairman Rakesh Kaul, who later served as president/CEO of Hanover Direct, notes, “Not many businesses out there have the balance sheet to go in and buy Fingerhut.”

Certainly Federated can’t expect to sell Fingerhut for what it bought the company for: $1.7 billion. And while the high price raised eyebrows at the time, so did the deal in and of itself. Federated’s department store chains, which include Bloomingdale’s, Macy’s, and The Bon Marche, appeal to middle-income and upper-middle-income consumers. The Fingerhut catalog, meanwhile, marketed to lower-income shoppers, in part by offering installment payment plans to people who didn’t qualify for credit cards.

In short, “the core Fingerhut business was never a fit with Federated’s department stores or customer base,” says East Greenwich, RI-based catalog consultant Coy Clement.

But Cincinnati-based Federated wasn’t buying Fingerhut for its foothold in the subprime consumer marketer, nor for its 54 million-name house file. Federated was interested primarily in Fingerhut’s e-commerce capabilities.

“That was in 1999, when e-commerce and the Internet looked bright and boundary-less,” says Jeff Sherman, chairman of Federated Direct, which includes Bloomingdale’s by Mail and Macys.com. “Web commerce was on the rise, as were other tertiery businesses.”

Not only did Fingerhut operate several of its own Websites, in 1999 it had also made minority equity investments in four e-commerce companies: Roxy.com, PC Flowers and Gifts, The Zone Network, and Freeshop. (All have since closed except PC Flowers, which is now managed by the Figi’s division.) The company also operated Fingerhut Business Services Inc. (FBSI), a provider of fulfillment services. At its peak in the late ’90s, Fingerhut and FBSI maintained three warehouses in Minnesota, Tennessee, and Utah, with a combined 3.5 million square feet, and handled 22 million parcels each year.

In addition to reaping business from the multitude of nascent online marketers, then, Federated’s acquisition of Fingerhut would enable FBSI to handle fulfillment for the Bloomingdale’s by Mail and Macy’s by Mail catalogs and Websites. The combined synergies of Federated and Fingerhut would take both marketers to another level.

At least that was the theory.

“They bet wrong on the marketplace in that they thought fulfillment for pure-play e-commerce marketers was going to be huge,” says Tony Lee, executive chairman of $150 million third-party fulfillment company NewRoads, based in Greenwich, CT. “Fingerhut had excess capacity in its distribution centers, which is where it started to go wrong,” he says.

Once the dot-com boom went bust, taking with it such one-time high flyers as FBSI client e-Toys, Fingerhut’s back-end facilities became less valuable to Federated. And so did Fingerhut as a whole.

As Sherman says, “The evaporation of e-commerce’s potential has left us with a base business that wasn’t our original reason for acquiring it.”

Credit woes create problems

Around the same time, Fingerhut’s credit business began to unravel. “Federated was so focused on Fingerhut Business Services and the Internet that perhaps it lost some focus that Fingerhut was essentially a low-end credit business,” suggests Claire Gruppo, president of New York-based catalog investment bank Gruppo, Levey & Co.

In April 1999, Fingerhut began shifting customers from its installment credit plan to an open-ended, or revolving, credit plan (similar to a conventional credit card). It also began extending credit at higher limits. A little more than a year later, Fingerhut had lost up to $400 million in credit delinquencies.

“We decided to right that business by taking the risks out of the portfolio,” Sherman says, mainly by reducing mailings to higher-risk customers. This in turn led to a 36% drop in sales, from nearly $1.26 billion for the first nine months of 2000 to $810 million for the comparable period of 2001.

Even as Federated was reducing Fingerhut’s circulation and credit limits, it was pulling back on its own direct business. The company shut its three-year-old Macy’s catalog at the end of November and scaled back its Bloomingdale’s Website considerably. Bloomingdales.com is now a marketing site, rather than a full-fledged online catalog, that supports the stores and, in conjunction with WeddingChannel.com, the bridal registry. By contracting its direct business, Federated expects to make the division profitable sooner rather than later.

This decision made Fingerhut even more of an ugly stepchild. “Once you come to the conclusion that the business is not a strategic fit to your company, and the economic outlook is not helpful to the business, the decision to shut Fingerhut down is almost inevitable,” Sherman says.

The end seems near

At press time, plans called for a final Fingerhut catalog to mail at the end of January. Orders would be taken through the end of March, Sanger says, and the Fingerhut Website would be used as a clearance center for inventory liquidation. Customer service phone lines and returns processing will “remain as long as necessary — at least until midyear,” Sanger says.

Once Fingerhut stops taking orders by the end of March, Federated will close its Piney Flats, TN, distribution center and its Johnson City, TN, call center. By then, all 1,300 employees from both facilities will be laid off. The other 4,700 employees will be laid off in waves throughout the year. Come summer, Sanger says, 800-1,000 will remain. By the end of 2002, about 200 will still be winding down operations. Some employees might be offered other jobs in the Federated organization, but “that will be done on an individual basis,” Sanger says.

These plans assume that none of the parties interested in buying Fingerhut manage to strike a deal with Federated. And there’s not much time in which to finesse terms. “This a nine-inning game that needs to be played in about an hour and fifteen minutes,” says BDG’s Masko. “You can’t allow this business to languish. If you lose one or two mailings in the cycle you’re dead in the water.”

What’s more, once they’re aware that Fingerhut is going to be shut down, its delinquent credit customers may be even less likely to pay their overdue bills, notes Mal Appelbaum, president of Scarsdale, NY-based consultancy Appletree Advisors.

“If Federated doesn’t sell Fingerhut in the next 30-45 days,” investment banker Gruppo said on Jan. 24, “they’ll shut it down.” The clock is ticking.

A HISTORY OF FINGERHUT

1948

Manny and William Fingerhut begin making and selling automobile seat covers in Minneapolis.

1949

Fingerhut begins to market seat covers via mail circulars to new automobile owners.

1950

1952

Company converts entirely to mail order.

1960

1962

Solo mailings and multi-mailers are primary marketing tools.

1970

1970

Fingerhut completes its first public stock offering.

1973

Fingerhut introduces a 36-page general merchandise catalog.

1974

Ted Deikel is named president/CEO.

1975

Fingerhut implements sophisticated computer-based credit screening techniques.

1977

Fingerhut develops computer technology to accumulate and analyze customer purchasing and behavioral data.

1978

American Can Co., predecessor of Primerica, acquires Fingerhut. Deikel becomes head of its specialty retailing group.

1980

1981

New credit offers are introduced, including deferred payment.

1982

Figi’s, a Marshfield, WI-based food gifts cataloger, becomes a wholly owned subsidiary of Fingerhut.

1988

Company reaches $1 billion in revenue.

1990

1990

After leaving Primerica in 1984 to start CVN Cos, which he sold to QVC Network in 1989, Deikel returns to Fingerhut and negotiates spin-off from Primerica.

1991

Fingerhut begins marketing to Spanish-speaking customers.

1995

Fingerhut launches online presence with Andysgarage.com and Fingerhut.com.

1996

Fingerhut forms Metris Financial Services subsidiary to grow its credit business.

1998

Fingerhut spins off Metris as a public company. It buys multititle apparel cataloger Arizona Mail Order and Popular Club, which offers general merchandise on a proprietary credit plan. Will Lansing joins Fingerhut as president.

1999

Fingerhut begins conversion from closed-end credit to revolving charge and acquires apparel cataloger Bedford Fair. In March, it becomes a wholly owned subsidiary of Federated Department Stores.

2000

2000

Fingerhut purchases the assets of women’s apparel catalogs Lew Magram and Brownstone Studio. Lansing departs as president and is replaced by Michael Sherman. Federated announces credit performance issues and plan to restructure the business. Fingerhut launches a Spanish-language site.

2001

Fingerhut closes call centers in Tampa, FL, and Duluth, MN, and its Mora, MN, print facility. E-commerce division is restructured.

2002

Federated announces intention to dispose of Fingerhut, through a sale or liquidation.

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