CATALOG CAPITAL

Experts agree: It’s difficult to generalize about how publicly traded consumer catalogs are doing on Wall Street. For one thing, direct marketing companies came late to the public trough and there are still relatively few. The sample size is just too small, especially if you want to look at sectors.

But there are some indicators that things are going well. Gruppo, Levey & Cappell Inc., New York, tracks 14 consumer catalogs. In the 12-month period between December 1996 and November 1997, these companies increased in value by an average of 85.3%. The consumer catalogs drove the strong performance of Gruppo’s GLC Portfolio of direct marketing stocks; those stocks climbed in price by an average of 35.7%, compared with a 26.2% gain in the S&P 500.

The three firms that went public during the period-Brylane Inc., Coldwater Creek Inc. and Delia’s Inc.-gained at least 72.5% in price. Gruppo Levey also reported good results for four companies that revamped their management and/or operations with an eye toward improving results. Stock prices for the four-Concepts Direct Inc., DM Management Co., Fingerhut Cos. Inc. and Hanover Direct Inc.-gained an average of 190%, with DM Management ringing in with a whopping 442.5%.

These companies are doing so well on Wall Street partly because the consumer catalog business overall is doing well. In the WEFA Group Inc.’s December 1997 study-commissioned by the Direct Marketing Association-consumer catalog sales are estimated at $48.3 billion for 1997, up 6.2% from $45.5 billion in 1996 (and up from a mere $33.6 billion in 1992). WEFA forecasts continued 6% growth through 2002, outpacing annual growth in total consumer sales, expected to be 5.3%.

Another good sign is the consumer catalogs’ stock price/earnings ratio, which is about 21, according to Larry J. West, of West & Cos., New York. “As an industry on the consumer side that’s not bad,” West says. “The Dow is at 23, S&P is at 28.”

West, who acts as an intermediary in deals for the direct marketing industry, says an increasing number of analysts are attending the meetings of the DMA’s investor relations committee, and more catalogs are discussing doing public offerings. “The more we get into that investing universe the better it becomes,” he adds. “Consolidators and investors are attracted to the industry because they know there are multiple ways to exit” an investment, such as through an initial public offering or a private sale.

Catalog consultant Jack Baer, of Muldoon & Baer Inc., Sugarloaf Key, FL, adds that many investors are buying catalog companies “with a view to an IPO in three to five years.”

Ken Gassman, an analyst who covers retailers, including catalogers, for Davenport & Co., Richmond, VA, says that Wall Street began showing interest in the direct marketing industry “because of the potential Internet exposure. Prior to that there was not much coverage of direct mail retailers. For one thing, Wall Street doesn’t know how to put a value on the mailing lists. They have a value but Wall Street doesn’t understand them, they’re such an intangible.”

Another good sign is that three catalogers went public last year, and one, Genesis Direct Inc., was doing an IPO at press time. Coldwater Creek Inc., Sandpoint, ID, an apparel, gift and jewelry cataloger, last year watched its stock increase 82.4% since its IPO to $31, according to Gruppo Levey. But in early May this year it was trading down at $22. For its first full fiscal year as a public company, which ended in February, Coldwater Creek reported net income of $11.7 million on net sales of $246.7 million, compared to pro forma net income of $5.9 million on net sales of $143.1 million during the previous year.

Special-size apparel cataloger Brylane Inc., New York, also went public, and its stock increased 72.5% to $51.75. In early May it was up further still, to $58.19. Between 1996 and 1997 revenue increased by 17.4%, from $601.1 million to 705.3 million. Net income rose between 1996 and 1997 by 5.4%, from $27.9 million to $29.4 million.

The third consumer cataloger to go public, New York-based Delia’s, targets “Generation Y” women between ages 10 and 24. The company, which has become a darling of the press, is also well liked by Wall Street. Last year its stock advanced 114.8% and has held steady at $23.50.

Now everyone has their eyes on this year’s IPO story, Genesis Direct Inc., a Secaucus, NJ-based cataloger started in June 1995 by alumni from PaperDirect. The company hoped to raise about $110 million from its IPO, which was scheduled for around press time. Since November 1996, Genesis has acquired 15 catalog companies-and a lot of debt. According to filings with the Securities and Exchange Commission, the company has received $168.1 million in funding since its inception. And yet, it expects a loss of about $76 million on sales of about $104 million for the year ended March 28, 1998, according to the SEC papers.

The catalogers, of course, have not been without their challenges. Some are just beginning to recover from the paper and postage blows in 1995-1996. “In 1995 they got hit with paper and postage. Starting in 1996 they improved merchandising and mailing,” says West. “For those that did a good job at that, 1997 was a good year and so has been 1998.”

Lillian Vernon Corp., based in New Rochelle, NY, has turned around nicely, and CFO Robert Mednick credits at least part of that to lower paper prices and also to “increasing revenues by doing some new strategies with respect to margins and costs.”

The company has had rises in average revenue per order (to $54.12) and in revenue per catalog. Its net income increased in fiscal year 1998, ended Feb. 28, for the first time in several years. After declining from $13.6 million in 1995 to $5.7 million in 1996, and to $5.4 million in 1997, it rose 68% to $9 million. Lillian Vernon’s stock increased 16.2% last year to $13.94, and in early May was up to $17.25.

With postage and paper out of the way, bad credit debt remains a problem. Fingerhut, based in Minnetonka, MN, said last year it has been acting to tighten its credit policies and reduce the number of high-risk orders, eliminating some high-ticket products and using external credit scores.

Fingerhut said both actions are helping bring down the delinquency levels but also temporarily reducing sales. Its sales have been flat-$1.76 billion in 1996 and $1.8 billion in 1997. But net income increased 72.4% from $40.2 million to $69.3 million. (For the quarter ended March 27, 1998, net earnings were $5.5 million on revenue of $367.3 million, compared to net earnings of $2.6 million on revenue of $350 million in 1997’s first quarter.) Fingerhut’s stock last year increased 66% to $20.75, and in May was up to almost $31.

piegel Inc., Downers Grove, IL, continues to struggle. It has been trying to address its merchandising problems, repositioning for more upscale products and modernizing the pages of the Spiegel catalog. It also has had big credit write-offs, according to Gassman.

For the year ended December 1997, Spiegel reported a net loss of $33 million on revenue of $3.06 billion, compared with a net loss of $13.4 million on revenue of $3.01 billion in 1996. Sales rose 1.4%, while the loss worsened by 246%.

For the first quarter this year, ended April 4, Spiegel was boasting about its loss of $23.1 million, compared to a loss of $31.2 million for the first quarter last year. (Revenue was $590.6 million, down 2% from $601.8 million last year.)

Total sales were down 7%, due mostly to a decline in total catalog sales (11%); store sales were down 1%. The company blamed the lower net sales on lower circulation for the Spiegel Catalog, while Eddie Bauer and Newport News enjoyed increased catalog sales.

Over the past year, Spiegel’s stock price has been swaying from a low of $4 to a high of $8.

With the 1998 American Catalog Conference now upon us, it pays to ask: How is the catalog business doing?

Pretty well, despite flat response in some categories, and uncertainty over use tax and other institutional problems.

As Thom Weidlich reports in his overview starting on this page, investors seem impressed with the progress at several publicly traded catalog firms, and stock prices have risen accordingly.

And individual success stories abound. For example, this issue of Catalog Special (sponsored by Acxiom/Direct Media) features a profile of Hickory Farms, which is building its brands in catalogs and on the Web. Managing editor Beth Negus wrote the piece.

Then there’s Coldwater Creek, which is in middle of an aggressive growth agenda. It has entered the Japanese market, and starting new catalogs at home, writes our Patricia Odell.

Finally, we profile Disney Direct Marketing, which has achieved spectacular growth over the last two years. This is due, in large part, to brilliant database marketing.

We hope you enjoy the supplement. Thanks to Direct Media’s Rosemarie Montroy for her help.

See you in Boston.

In general, we are mailing more to our customers and are planning to increase our mailings for the holiday season. Our mail order business is growing and within the last year it had about a 10% growth rate, so in order to keep up with the growth of the business and stay at this pace we need to increase our circulation to customers and prospects. We currently mail over 20 million catalogs and solo mailings to our customer base of 1.2 million active customers. For the most part we use our in-house files for our direct mailing. The majority of our purchases are made by repeat customers and we have a very sophisticated database that enables us to effectively track our customer base.”