Hanover Direct: The Saga Continues

Feb 01, 2001 10:30 PM  By

In what has become one of the industry’s most closely watched soap operas, Hanover Direct announced Jan. 5 that it is laying off 285 employees – 11% of its workforce – and shutting three of its catalogs. In addition to closing its high-end bedding book Turiya, as announced late last year, Hanover is folding its Kitchen & Home and Kitchen & Garden titles. The moves were announced one month after the $550 million cataloger replaced CEO Rakesh Kaul with turnaround specialist Tom Shull.

The multititle mailer is also consolidating or discontinuing several initiatives that were introduced under Kaul’s watch. For instance, it is pulling the plug on Always in Style, an online personalized recommendation engine, in exchange for a fourth-quarter asset write-down of $500,000. It is also ending its exclusive licensing agreement with Compagnie de la Chine, a manufacturer of upscale goods, resulting in a charge of $3.9 million.

And in what may be the most significant break from the Kaul era, Hanover is consolidating its Erizon division, which provides third-party back-end services. By the end of March, Erizon’s Maumelle, AR, fulfillment and telemarketing facility will be closed, and all activities will be consolidated within the Hanover, PA, facility of Erizon’s Keystone Internet Services division. It had been Kaul’s idea to capitalize on the dot-com boom by offering Hanover’s operational expertise to pure-plays that had neither the time nor the inclination to build their own fulfillment infrastructures.

Closing the Maumelle facility will produce a noncash charge of about $5.4 million. The layoffs will produce a charge of another $8.6 million. But by cutting down its workforce, which at the end of the year had consisted of about 2,500 employees, Hanover expects to save about $26 million a year.

Back to the brands Outsiders interviewed by Catalog Age profess not to be surprised by the cutbacks. “Hanover has underperformed on some key metrics, such as return on investment, during the past five years,” says Kevin Silverman, managing director of Chicago-based investment bank ABN-AMRO. “And investors wanted to see some kind of ROI. Closing down some of its businesses is a good way to raise capital.”

For the first three quarters of 2000 – the most recent figures available at press time – Hanover posted a net loss of $41.9 million on sales of $413.9 million. The lion’s share of the loss resulted from its Erizon division. In fact, on its own, the direct commerce division posted net income of $3.2 million for the first nine months of fiscal 2000. And of Hanover’s third-quarter net loss of $14.8 million, $12.4 million resulted from Erizon. For the fourth quarter, Hanover estimates total sales will be $179.2 million, up 13.5% from the fourth quarter of 1999.

Nonetheless, Kaul stands by his decision to diversify Hanover into the third-party fulfillment arena. It’s a “capital-intensive business,” he notes. “You have to invest in system technology that costs about $100 million or $200 million and play to win.” A lack of resources, he suggests, prevented Erizon from winning. “We did not consummate the equity financing that we needed to take our third-party service business to the next level.”

Shull did not return phone calls by press time. In a Jan. 5 statement, though, he declared that Hanover would work “primarily towards continued profitable growth in Hanover Brands, such as The Company Store, Domestications, Improvements, and Silhouettes.” The Company Store, a midrange catalog of bedding and home decor items, has long been one of the company’s cash cows.

As for some of the other brands, such as lower-end bedding title Domestications, Kaul takes credit for helping to turn them around. “When I came in [in 1996], Domestications was in free fall,” he says. “Every brand was reporting a loss. The company as a whole reported a loss of $104 million. [Today] all of the brands are leaders in their market positions.” In addition to home goods titles Domestications and The Company Store, children’s home furnishings spin-off Company Kids, plus-size women’s apparel title Silhouettes, and home improvements book Improvements, Hanover also produces upscale home decor title Gump’s By Mail, men’s apparel catalogs International Male and Undergear, and Encore, a clearance book featuring products from multiple Hanover brands. The company also owns the famed Gump’s store in San Francisco.

Regardless of who should receive credit for bolstering the brands, several observers agree that Shull’s decision to focus on them, rather than on providing fulfillment services, is the best way to turn around Hanover. “I’m happy to see that he’s focusing on the brands,” says Jack Rosenfeld, president of multititle catalog company Potpourri Collection and a Hanover veteran. “The Hanover brands are strong and profitable. I think that he’s focusing on them is terrific.”

The bottom line is about making the core books more productive – or creating spin-offs that leverage brand equity productivity, says Martin Brill, a New York-based catalog and e-commerce consultant. “Just cutting circulation [as Hanover did several years ago] to give the impression of being more profitable can only go on for so long,” he explains. “Many catalogers have hit a wall in terms of their ultimate universe, but the size and health of a catalog’s house file is a tremendous measuring rod when investors are buying stock in a catalog company.”

As this issue went to press, the Postal Rate Commission (PRC) was about to rule once again on the postal rate case. The U.S. Postal Service Board of Governors (BOG) had returned the case to the PRC “under protest” on Dec. 5 after the PRC recommended an average rate increase of 4.6% in November, rather than the average hike of 6.4% the BOG had originally sought.

Postal sources interviewed by Catalog Age, including economic consultant Walter Bernheimer II, president of Wellesley, MA-based Bernheimer Associates, doubt that the PRC will change its mind and grant the BOG the rates it originally requested. Nevertheless, the BOG said in written testimony after accepting the PRC rates under protest that it was prepared to overrule the PRC if it didn’t get the additional revenue. USPS chief operating officer John Potter said in a recent speech that the USPS could lose $1.2 billion in fiscal 2001, which ends in September, if the agency doesn’t gain the rate hike it had wanted. Even if it gains that revenue, Potter said, the USPS would still lose $480 million. The chart above shows the downward spiral the agency has taken since posting an unprecedented $1.8 billion profit in 1995.

Consumer confidence was already flagging in early November, when the closest presidential election in recent history wreaked havoc on catalog order curves. Mailers typically expect slow sales during the days immediately before the election – and they were – but when the outcome dragged on for weeks, some catalogers never bounced back.

The day of and after the Nov. 7 election, many mailers, including apparel cataloger L.L. Bean and personal-care products marketer SelfCare, suffered a sales slowdown. But some, such as jewelry, tabletop, and gifts cataloger/retailer Ross-Simons, “didn’t get a late rush of orders to make up for it,” says Bob Simone, executive vice president/chief operating officer for the Cranston, RI-based company. Ross-Simons’s holiday sales came in below plan at 5%-6% ahead of last year’s sales on a 7%-8% circulation gain.

Gifts cataloger Wild Wings moved up its early November drop to Nov. 1 to avoid mailing during the week of the election. “We then remailed the same catalog with a different cover on Nov. 21,” says Andrew Webster, the Lake City, MN-based marketer’s direct mail manager. “Orders slowed down almost immediately [following the election] but picked up once again after the turmoil dropped off. But I don’t know if we regained the number of orders we lost – I suspect a majority of those election-time orders were lost for good.”

Those catalogers that made or beat plans were able to fend off what at least one recent report on overall retail sales called “the worst holiday season in a decade.” Indeed, as both The Conference Board’s and the University of Michigan’s economic indices for December indicate, consumer confidence has plunged.

The University of Michigan’s Index of Consumer Sentiment statement for December showed a 9% drop in consumer confidence between November and December, from 107.6 to 98.4. Even worse, the university’s Index of Consumer Expectations plunged 11%, from 101.6 in November to 90.7 in December.

Similarly, The Conference Board’s Consumer Confidence Index fell 3%, from 132.6 in November to 128.3 in December. The Expectations Index fell more steeply, from 101.2 to 95.8, while the Present Situation index ebbed from 179.7 to 177.0. If expectations continue on this downward trend, many analysts believe a more severe economic slowdown may be on the horizon.