Spiegel’s Had Enough of the Credit-Card Business

The Spiegel Group announced on Feb. 21 that it would sell its private-label credit-card business, which includes its First Consumers National Bank subsidiary, and shutter 45 underperforming Eddie Bauer stores. The company also plans to cut back circulation of its catalog businesses — Spiegel, Newport News, and Eddie Bauer — to focus on growing profits rather than revenue.

For fiscal 2001, the credit-card unit racked up losses of $69.3 million. Shedding the division will help Downers Grove, IL-based Spiegel “fully direct our resources to our catalog and retail businesses,” says spokesperson Debbie Koopman. The company is working with J.P. Morgan and Bank of America to find a buyer — or buyers, if no one party wants to acquire the business whole.

Once it unloads the unit, Spiegel will develop a relationship with a third-party credit company — probably the buyer — to continue offering its private-label credit cards to consumers, Koopman says. Numerous other catalogers, including L.L. Bean and Lands’ End, offer branded credit cards in conjunction with companies such as Visa and Mastercard.

Of all Spiegel purchases paid for by credit card, 78% were charged to the company’s private-label cards. In fact, a key benefit of the card program for Spiegel was its ability to drive merchandise sales. Merely by loosening its credit criteria and offering more consumers its branded cards, Spiegel could spur top-line growth. “All in all,” Koopman says, “it had a positive effect on our sales.”

Those additional merchandise sales came at a price, of course. “When you ease up your credit scoring to entice more lower-income buyers,” says Kevin Silverman, an analyst with capital growth fund ABM AMRO/Chicago, “you allow less creditworthy people to borrow, and fewer loans get paid. Then you have to rein in the credit side, and the merchant side suffers.”

Silverman approves of Spiegel’s decision to sell the credit-card business. “If there were long-lasting benefits to being in the credit business, the best catalogers would do it — but they don’t,” he says. “And being a great direct marketer has nothing to do with offering credit. Instead, credit makes management spend a lot of time trying to figure out how it works, and then they get too emotionally involved in it and try to use credit to drive their merchant strategy.”

Eric Beder, senior vice president of New York-based investment bank Ladenburg Thalmann, agrees that selling the unit is something that Spiegel “should have done years ago. It’s not Spiegel’s core business. Investors want clean, easy companies to invest in.”

Back to the bottom line

They also want profitable companies to invest in, and 2001 was far from profitable for Spiegel. The company lost $397.7 million, compared with net income of $120.8 million for fiscal 2000. Even discounting the $310.5 million loss related to the disposal of the credit-card unit and the unit’s nearly $70 million loss, Spiegel still would have had a net loss of almost $18 million. What’s more, Spiegel’s annual sales fell 9%, to $2.78 billion from $3.06 billion in 2000.

Spiegel’s poor performance led it to fall out of compliance with certain loan covenants. But the company is working closely with its bank and its majority shareholder, Germany’s Otto family, to restructure its credit facilities. Its goal at press time was to have new financing agreements in place by mid-April.

In the meantime, Spiegel is trying to turn around its catalog and retail businesses. Beyond closing the underperforming Bauer stores, which will leave 515 stores, Spiegel is shutting its Wichita, KS, call center next month, laying off 670 workers.

In addition, the company will trim the circulation of its three titles by 10.6% overall. Newport News will have the largest circulation decrease — 17%, from 254 million books mailed last year to 211 million this year. The women’s apparel title circulated 8% more catalogs in 2001 than the previous year, but sales didn’t gain proportionately, Koopman says. “So we will be more cautious this year and improve productivity.” Newport News catalogs will have fewer pages on average than last year, but they’ll mail more frequently.

Circulation of the Eddie Bauer apparel and home goods books is decreasing 5%, from 110 million last year. And circulation of the core Spiegel catalogs will fall 3%-4% this year. At the same time, however, the company is experimenting with offering its “big book” free to requesters, rather than charging $10 for it.

And this month, Spiegel is introducing a loyalty program. Depending on how much they spend, customers can earn chocolates from the Ethel M. catalog, a weekend vacation, or a four-day retreat at the Miraval Life-in-Balance Resort in Arizona.

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