Having spent the better part of its first three years on a catalog-buying binge after raising some $134 million in capital, Genesis Direct has put on the brakes. The company has discontinued its catalog acquisition program indefinitely, because “we want to bring our costs in line with our target levels,” CEO Warren Struhl said in a November statement. “Financial results were impacted by lower than expected gross margins.” As of Nov. 30, the $360 million company’s stock was trading at $7, less than half of the $16.25 per share price shortly afterGenesis went public last May. And for its second quarter, ended Sept. 26, the company lost $21.2 million on net revenue of $41.0 million (it lost $16.4 million on sales of $11.5 million a year earlier).
Genesis’s management team-cofounders Struhl, chief marketing officer David Sable, and chief operating officer Hunter Cohen-have long insisted that several years of losses were part of the business plan. But in November when it announced its second-quarter results, Genesis also announced that it had embarked on a cost-cutting program from which it hopes to save $21 million. As part of that plan, it has closed or announced plans to close at least seven of its 30-plus catalogs (see “Catalogs by the numbers,” at right), has consolidated operations, and has reorganized its management staff. So far, Genesis has merged three of its four divisions-sporting goods, gifts and collectibles, and children’s goods-and two of the previous division heads have left or will leave the company. Jim Abrams (children’s) departed in August; at press time, Charlie Silver (gifts and collectibles) was planning to leave at the end of 1998. Meanwhile, former Time-Warner catalog vice president Mitch Rothschild, who had headed the sporting goods unit, was named president of the combined group in August. Vice president of operations Alan Kipust remains in charge of the institutional division.
Raising even more questions, Genesis also announced in its November statement that it had retained New York-based investment bank Goldman, Sachs & Co. “to evaluate unsolicited sale and investment inquiries.”
Buzz, buzz, buzz Genesis is vague, at best, as to what these changes mean. Sable will say only that he, Struhl, and Cohen are not looking to unload the company and that it is not running out of cash. “We’re very bullish on our business and very committed to it,” Sable says. There’s no denying, however, that the rest of the industry is buzzing.
Nick Holland, managing director of Boston-based investment banker Ulin & Holland, says that “it seems clear that Sable, Struhl, and Hunter are trying to sell the business, either in whole or in parts. My guess is they’ve taken their capital as far as it will go, and the banks have given them as much rope as they’re going to give.”
Holland also says that because Genesis’s stock has shrunk so far below its offering price, “it would be difficult to go back to the public market. Until that changes, they’re probably wise to explore a sale.”
The company’s biggest problem, Holland believes, has been the low profitability levels of many of the books it acquired. “Genesis bought some catalogs that hadn’t previously been performing well-such as music catalog Sound Exchange, which had been in bankruptcy before Genesis bought it….This is in stark contrast to International Cornerstone Group, which has bought all profitable catalogs [among them Frontgate, Ballard Design, and The Territory Ahead], which are considered leaders in their respective niches.”
Another Genesis observer (who refuses to be named) believes that the company’s overall game plan was flawed. The strategy, the source says, was “to accumulate a large stable of mostly small catalogs that are very different and marginally profitable at best….as a result, it’s in too many kinds of businesses and lacks a singular focus.”
On the other hand, Genesis still has its believers. Jim Stoeffel, emerging growth analyst with New York investment firm Salomon Smith Barney, says that regardless of the latest change in strategy, Genesis isn’t too far off-track. “The timing of the company’s IPO was unfortunate, because it came out right before the stock market corrected itself,” he says. And while the decision to stop buying catalogs came as a surprise to Stoeffel, he isn’t surprised that Genesis continues to operate at a loss. “Buying unprofitable companies was the strategy. If Genesis can now demonstrate that it can [begin to] operate its existing catalogs profitably, then the stock will start to go up, and the company can think of making more acquisitions again.”
Stoeffel says his firm had forecast that Genesis would add 10-15 titles this year, “but now the company has to demonstrate to the Street that it can operate a $500 million business profitably rather than a $1 billion business”-which according to Stoeffel had originally been the plan.
As for the management consolidation, Stoeffel shrugs it off. “You always expect consolidation with a company like this, because if you cut back catalogs, you don’t need the same number of people.”
Another source familiar with Genesis agrees that it’s too early to make any judgments about the cataloger. “Look at Amazon.com-it wasn’t planning to make money for its first 10 years,” the source says. “And a number of the Genesis books are, in fact, profitable. Others are on the verge of making money, and that fits into the model. It’s just that the company grew a little too quickly and needs some more expertise in direct mail” to get to the next level.
As of December 1998, Genesis Direct was operating more than 30 catalogs; by spring, that number will likely drop to less than 30. Chief marketing officer David Sable says the fall/holiday 1998 mailings of three unprofitable catalogs-Ninos (children’s gifts), Global Friends (children’s dolls and collectibles), and Training Camp (team sports gear)-were probably their last.
In the fall, Genesis had closed USA Pro Sports, a European sporting goods catalog it bought only a few months prior. Around the same time, Genesis also shut down Romance Boutique, a spring 1998 startup gifts catalog, due to low response, Sable says. And earlier in ’98, Genesis closed Boston Traditions and Beyond the Horizon. Genesis’s other titles include Lilliput (collectibles), Biobottoms (children’s apparel), Hot Off The Ice (hockey gear), The Edge Co. (knives), Competitive Edge Golf, and Carol Wright Gifts. -PM