THE NEW FINGERHUT Jul 1, 1999 12:00 PM
, Diane Cyr
JobZone
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Right here," says Will Lansing, president of Fingerhut Cos., "we have the
look and feel of the new Fingerhut." He's holding up a 1999 Spring Big
Book. It has no brown-paper cover wrap. No bargains hawked in 30-point
type. Inside, there are no veneer nightstands at 12 payments of $6.99. Even
the old hokey Fingerhut typeface is gone. This thick and glossy catalog,
featuring models cavorting in blue-sky landscapes, "is an Architectural
Digest look by design," Lansing says.
Two years ago, comparing Fingerhut to Architectural Digest would have been
tantamount to comparing Burger King to The Four Seasons. But then, nobody
knew that Fingerhut would become one of the catalog industry's top
consolidators and Internet marketers. Or that it would eventually attract a
wealthy suitor like Federated Department Stores, owner of Bloomingdale's
and Macy's, which in February paid $1.7 billion for the firm. That price
was $25 per share-more than triple Fingerhut's share price nine months
earlier.
So what happened in this Pygmalian saga? Faced with stagnant sales and an
outmoded installment-plan credit policy, Fingerhut Cos. rebuilt itself from
the assets up. Armed with a huge household database (31 million names) and
about 500,000 sq. ft. of unused fulfillment space, Fingerhut took aim at
the world of e-commerce and acquisitions. Since mid-1998, it's invested in
five Internet companies, launched three more of its own, spun off six
specialty books, and purchased three major apparel catalogers: Arizona Mail
Order, Bedford Fair, and Popular Club. Meanwhile, Fingerhut's core
catalog-which accounts for about $1 billion of the firm's nearly $2 billion
in annual revenue-has upgraded its merchandise and features revolving
credit instead of installment plans. The result? After two years of
stagnant sales, net sales from existing customers were up 2% in the 1998
fourth quarter.
Coming from Fingerhut, one of the industry's quiet giants, the changes
surprised some. Until two years ago, "I don't think Fingerhut had much of a
strategy," notes Craig Battle, managing director of Princeton, NJ-based
investment banker Tucker Alexander. "But what it had, which is powerful,
was 31 million customers and a very efficient fulfillment infrastructure."
Evidently, those assets were attractive enough to kick-start direct
marketing at $15.8 billion Federated. Within weeks of the deal, Macy's by
Mail began reporting to Fingerhut executive vice president Michael Sherman;
Macys.com was put under Fingerhut's e-commerce president, Andy Johnson.
(Bloomingdale's by Mail remains under Federated's command.)
The merger appears to empower both parties. Federated gets to hook onto
what looks like a rising direct marketing star, and Fingerhut gains more
acquisition muscle-while retaining much of its autonomy. And both firms may
gain customers. Fingerhut won't specify numbers, but Lansing notes,
"Federated could pass on its credit rejects to us, and our customers could
graduate to Federated."
The deal has its skeptics, though. "$1.7 billion is a rich price to pay,"
says Jeff Stein, managing director of McDonald Investments in Cleveland.
"If Federated wanted [Fingerhut's infrastructure], it could have replicated
it for a lot less than $1.7 billion." Moreover, Fingerhut's typical buyer-a
40-year-old woman with $15,000-$35,000 average income-is younger, less
educated, and less affluent than Federated's. "I just don't think there are
very many synergies," Stein says.
But others say it's too soon to judge this deal. "It's a work in progress,"
says David Leibowitz, managing director of Burnham Securities in New York.
"It will likely take two or three years to determine if this is a wise
acquisition."
Betting on the Web
By then, though, Fingerhut Cos. will probably have shape-shifted yet again.
Lansing says Fingerhut will eventually become a leading "infomediary," an
Internet-dominant "one-to-one marketer" designed to "broker transactions
between suppliers and consumers."
Under Lansing, the company has moved decisively into Web territory. Last
July, it bought a chunk of flowers-and-gifts Web marketer PC Flowers, now
undergoing an IPO. Five months later, Fingerhut bought stakes in two Web
ventures: climbing and skiing site MountainZone; and FreeShop, a site of
samples and magazine-subscription trials. Earlier this year, Fingerhut
invested in Internet equipment marketer Roxy Systems, and in computers
marketer Hand Technology.
Fingerhut is also concentrating on its proprietary Websites. The biggest is
Andy's Garage, originally set up in '95 as a giant "garage sale" for
overstock electronics, gas grills, and other household merchandise. ("Andy"
refers to e-commerce president Andy Johnson.) Though he won't reveal sales
or hits, Lansing claims that demand has fast outstripped supply, and the
site draws a younger, more male demographic.
TheHut.com, Fingerhut's Gen-X Website, is also attracting a new (and
younger) audience. The purveyor of lava lamps and subwoofers now gets 2,000
hits per day and is supported by TheHut.com catalog, mailed to 800,000
(mostly rental) prospects. Sales are about 50/50 catalog/Web.
But e-commerce is still in its infancy. This year, Fingerhut's Websites
will bring in only about $100 million in sales-about 5% of Fingerhut's
expected gross revenue.
A 'natural consolidator'
With this in mind, Fingerhut has been growing much more aggressively via
acquisitions. This past September, looking to step up its share of the
apparel market, it bought Arizona Mail Order-its first catalog acquisition
in nearly eight years.
"We wanted to grow bigger and get more synergies," says Arizona Mail Order
president Steven Lightman. For instance, Fingerhut can now share its credit
clout with the apparel mailer, which previously denied credit to 60% of
shoppers acquired from Fingerhut rental lists.
Besides, the price was right. Fingerhut paid a reasonable six multiple on
Arizona's $19 million earnings. A few months later, it got even better
bargains at Bedford Fair, which was in Chapter 11 (paying $39 million for
the $100 million firm in December), and Popular Club ($42 million to J.
Crew for the $180 million company in November). Bedford Fair skews to a
professional, older audience; Popular Club skews to a lower-income urban
household. Both gave Fingerhut new customers, while Fingerhut gave back
buying clout and operational efficiencies. Popular Club is profitable;
Bedford Fair is on track for profits in the third quarter.
By the time Federated came knocking early this spring, Fingerhut had
boosted net sales 6%, to $1.6 billion, and net earnings on continuing
operations were up 22%, to $46 million. Given Federated's sluggish 1.1%
top-line growth, the Fingerhut buy "was a growth strategy for us," says
Federated spokeswoman Carol Sanger. And she insists that Federated will
take a hands-off approach to Fingerhut's aggressive expansion strategy.
If that's the case, Fingerhut will no doubt keep poring through
prospectuses. "We're the natural consolidators in this industry," Lansing
says. "We have the database science, we have the huge infrastructure, and
we're interested in catalog companies that few others want to buy."
