Will Spiegel Survive Chapter 11?

The first quarter of 2003 hasn’t been a stellar one for multititle mailer The Spiegel Group. Even before filing for Chapter 11 bankruptcy protection on March 17, the company endured substantial layoffs, top management turnover, and a Securities and Exchange Commssion (SEC) investigation. Now industry observers are speculating the fate of the once-mighty general merchandise giant.

Some sources believe that although Spiegel’s presumed primary objective is to turn around all the parts of the company, which includes the Newport News women’s apparel catalog and apparel and home goods cataloger/ retailer Eddie Bauer, a partial fire sale could take place. Coy Clement, president of East Greenwich, RI-based consultancy ClementDirect and a former vice president of direct marketing for Eddie Bauer, predicts that Bauer will be spun off into a separate corporation or sold to a large financial group, such as, say, Texas Pacific Group, which owns cataloger/retailer J. Crew.

Indeed, several sources contacted for this story believe that of Spiegel’s three brands, Eddie Bauer would generate the most cash in a sale. “The Eddie Bauer brand has definite value, and [its problems] can be straightened out,” says Jim Alexander, managing director at Princeton, NJ-based investment bank Tucker Alexander.

Spiegel acquired Eddie Bauer in 1988 and significantly expanded the brand’s retail presence. The chain now has 535 stores. Still, for the year ended Dec. 28, net sales at Eddie Bauer — which accounts for 60% of Spiegel’s sales — fell 11%, to $1.4 billion.

As for Newport News, Clement believes it would do well to wind up in the hands of a large multititle mailer of lower-end apparel. But the Spiegel catalog is “more problematic,” he says.

“Spiegel’s merchandise strategy has often changed during the past few years, and now it seems the merchandise strategy is underpinned by credit,” Clement says. “At some point, you have to look at whether the Spiegel catalog is worth fixing. My guess is either Spiegel won’t exist or its house file will be sold as an add-on to the buyer purchasing Newport News.”

Spiegel spokesperson Debbie Koopman says the company has not yet considered selling any of its properties, however. “We’ll develop a plan of reorganization,” she says without specifying a time frame. “Then the court has to approve the plan.” (Because Spiegel’s legal team is based in New York, as is its Newport News unit, the company chose to file at the Bankruptcy Court for the Southern District of New York.)

Top-level turnover

In sorting out the Spiegel mess, it doesn’t help that the company has recently experienced significant turmoil in the executive suite. Executive vice president/chief financial officer James Cannataro and president/CEO/vice chairman Martin Zaepfel resigned in February. Spiegel promoted Newport News senior vice president/chief financial officer James Brewster to Cannataro’s position. The company also hired William Kosturos, a managing director at turnaround firm Alvarez & Marsal, as “chief restructuring officer” and interim CEO to replace Zaepfel.

Then on March 14, Spiegel named Geralynn Madonna president/CEO of the Spiegel catalog and Newport News. Madonna, who had been president/ chief operating officer of Newport News, replaced Spiegel catalog president/CEO Melissa Payner and Newport News chairman/CEO George Ittner, who “resigned to pursue other interests.” Ittner will provide consulting services to the company, however. Madonna has the unenviable task of getting Spiegel back on its feet, and if that doesn’t work, potentially selling properties or partial liquidation.

Observers of the Spiegel saga agree that the marketer’s Chapter 11 filing was a long time coming. Sales had tumbled 25% in two years, from $3.06 billion in 2000 to $2.28 billion in 2002. This past June, Nasdaq delisted the company for not reporting annual earnings on time.

And after failing to sell its First Consumers National Bank (FCNB) credit-card division, Spiegel in March stopped accepting charges on FCNB-issued cards and announced plans to liquidate the bank. (Not part of the Chapter 11 filing, FCNB is being liquidated under the terms of a preexisting consent order entered into with the Office of the Comptroller of the Currency in May 2002.)

If Spiegel can emerge from Chapter 11 successfully and intact, it will be among a minority. Eighty-five percent of companies filing Chapter 11 do not make it out, says Mal Appelbaum, president of New York-based direct marketing financial advisory firm Appletree Advisors. “And of those that do emerge from Chapter 11, a substantial number of those companies ultimately wind up being liquidated.”

In Spiegel’s favor, Appelbaum notes, was its ability to obtain $400 million in financing so that it can continue to operate. At the time of the Chapter 11 filing, Spiegel said it had secured a $400 million debtor-in-possession (DIP) financing facility to supplement the company’s cash flow during the reorganization process.

Searching for the positives

Indeed, company followers are searching for some encouraging signs about Spiegel’s situation but finding little. “The fact that assets exceed liabilities by $1 billion is obviously good,” Applebaum says. “But current liabilities, including senior debt, exceeded current assets — cash, receivables, and inventory — by $700 million at the last financial statement date. And that’s the key measure.”

All incoming revenue going forward must be paid to the secured creditors, such as financial insitutions, first. Spiegel has $800 million in unsecured liabilities and creditors. Spiegel’s largest unsecured creditors include a host of banks, among them Commerzbank AG, Dresdner Kleinwort Wasserstein, Bank of America, J.P. Morgan Chase & Co., and Credit Suisse First Boston. Other unsecured creditors include vendor companies such as catalog marketing firm Seta Corp., printer R.R. Donnelley & Sons Co., paper supplier International Paper, and primary carrier United Parcel Service.

Spiegel was able to petition the bankruptcy court for leniency on paying back its unsecured creditors because these were closed operations relating to the credit-card business. As a result of the filing, Spiegel “should have some flexibility,” Appelbaum says. “Not having to pay the vendors back or having to pay them back a reduced figure is a tremendous advantage of filing for bankruptcy. My guess is that a large part of the DIP financing that will go to the credit-card securitization.”

The question now regards the viability of the ongoing businesses. “Do the businesses in question throw off good cash flow?” Clement asks. “Do the brands have inherent value? Or conversely, does the company determine that the brands are worth more in liquidation than an outright sale to another buyer?

“What needs to be decided is the financial structure of the business going forward,” Clement continues. “Both Eddie Bauer and Newport News are significant brands and have value. Fundamentally, Spiegel’s credit-card business is what was bringing them down.”

SPIEGEL TIMELINE

1865 Joseph Spiegel opens furniture store in Chicago.
1905 Spiegel mails its first 24-page catalog; company offers credit services through the mail.
1950s Radio and television quiz shows offer contestants prizes from Spiegel; catalog products range from apparel and furniture to car parts and garden tools.
1976 Hank Johnson joins Spiegel; he is credited with shucking its down-market roots in the late ’70s/early ’80s by targeting working women with higher-end apparel brands and niche catalogs.
1982 Germany’s Otto Versand acquires Spiegel.
1988 Spiegel acquires Eddie Bauer and Honeybee.
1989 First Consumers National Bank (FCNB) acquired.
1991 Retail division of Honeybee closed, catalog consolidated with Spiegel book.
1993 New Hampton assets, including the Newport News, James River Traders, and Brights Creek catalogs, acquired.
1999 Apparel catalog Clifford and Wills acquired from J. Crew; brand is later folded into Spiegel catalog.
Feb. 2002 Announces plans to sell its private-label credit-card business, which includes its FCNB subsidiary, and shutter 45 underperforming Eddie Bauer stores, as well as cut back circulation of its catalogs.
Mar. 2002 Announces plans to close Wichita, KS, call center, laying off 670 workers.
Jun. 2002 Nasdaq National Market delists the Class A common stock of Spiegel Group; the cataloger had yet to file its annual and quarterly financial statements.
Jan. 2003 Spiegel lays off 300 workers from two of its call centers — nearly one-third of the 950 employees at the facilities.
Feb. 28 President/CEO/vice chairman Martin Zaepfel resigns; William Kosturos, managing director at turnaround firm Alvarez & Marsal, hired as chief restructuring officer/interim CEO.
Mar. 7 Securities and Exchange Commission begins its investigation into Spiegel’s compliance with the federal securities law.
Mar. 11 Stops accepting charges on FCNB-issued credit cards; plans to liquidate FCNB.
Mar. 14 Geralynn Madonna named president/CEO of Spiegel catalog and Newport News.
Mar. 17 Spiegel files for Chapter 11.

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