Three years ago, the founders of Genesis Direct were convinced that they could create a new business model – buy up dozens of small catalogers and, thanks to the ensuing economies of scale, give rise to a profitable catalog kingdom. Apparently, they were wrong. The company filed for Chapter 11 bankruptcy protection on Aug. 19.
The filing came a day after the Secaucus, NJ-based company laid off 45 middle-management employees – or more than one-third of its staff. And just six months earlier, Genesis had renamed itself Proteam.com to signify a focus on e-commerce and downsized to just a handful of sports-related catalogs and Websites.
Harry Usher, who was appointed president/CEO in July when cofound-er Warren Struhl resigned (Struhl remains chairman of the board), says the company stumbled when deals to sell two of its catalogs – high-tech gadgets title The Edge Co. and Carol Wright Gifts – fell through in August. Selling the two books, which have combined sales of more than $150 million, would have helped ward off the bankruptcy filing, Usher claims.
For the fiscal year ended March 27, Proteam’s net loss was $155.8 million on net sales of $252.3 million. For themost recent quarter, ended June 26, the net loss was $32.7 million on net sales of $38.4 million.
As for how Proteam found itself in such straits, explanations vary. “We built an infrastructure for a billion-dollar business and were unable to fill the pipeline with enough acquisitions to sustain the cost of that structure,” says vice president of marketing Monica Schulze-Hodges. Sources say that the company’s multimillion-dollar, state-of-the-art fulfillment center in Memphis, TN, was a financial drain until it was sold to Toys `R’ Us in June. Since then, Proteam has leased warehouse space from the retailer – at a reportedly high fee.
Proteam’s downfall is also tied to the stock market, Schulze-Hodges claims. “Our stock didn’t rebound last fall when most of the market did, because we were considered a catalog company while the Internet stock-buying frenzy was beginning.” After Genesis filed its initial public offering in April 1998, its stock price was never able to climb back to its original price of $16.25 a share.
But many observers criticize cofounders Struhl, David Sable, and Hunter Cohen – all of whom resigned from their executive positions over the past few months – for acquiring so many unprofitable or marginally profitable catalogs. “The original concept was weak, because they bought small emerging companies,” says Howard Kupfer, senior vice president of brokerage for Hackensack, NJ-based list firm Mokrynski & Associates, which did business with Genesis.
Mike Petsky, CEO of New York-based investment bank Petsky Prunier, agrees. “It goes to show what a bad acquisition strategy can do,” he notes. “If Genesis had stuck to marketing sports and kids’ products [the company’s original markets], without the ambitious plans of being a catalog conglomerate, maybe it would have survived.”
Then again, “Genesis was buying the same types of catalogs in the same types of industries – what’s the need to have nine catalogs in the sporting goods industry?” says Kenneth Karlan, the president of Bethel, CT-based competitor Star Struck, which sells minor league baseball merchandise. “And by building an infrastructure for a $1 billion company that did $200 million, they put the cart before the horse.”
A rough road ahead
For Usher – who had been CEO of the Association of Volleyball Professionals from January 1998 until it, too, filed for bankruptcy protection in October ’98 – emerging from Chapter 11 is just the latest challenge to be met. “I had high expectations in July that The Edge Co. and Carol Wright would be sold, that inventory financing would be available, that cost savings could be achieved,” he says. “But those things didn’t materialize.”
Some observers believe the company is likely to be ordered by the U.S. Bankruptcy Court in Newark, NJ, into Chapter 7 liquidation because it’s so deeply in debt. While Usher won’t disclose how much Proteam owes, he says, “I don’t think we’re anywhere near Chapter 7. Nobody here is thinking that. Our various entities are still in a situation to go forward, be sold off, or reorganized.”