The Spiegel Group, once a shining example for catalog firms everywhere, is now struggling to survive.
Its financial position is so precarious that were it not for the support of majority shareholder Otto Versand, the company would likely go under, analysts said.
Otto has sent aid from Germany in the form of $160 million in “liquidity support,” and last year dispatched a high-ranking executive, Martin Zaepfel, who took over as chief executive officer.
“Otto Versand, in some respects, is keeping it afloat both with money and managerial talent,” said Eric Beder, senior vice president and analyst at Ladenburg Thalman & Co. in New York.
At press time, the company was late in filing its annual report. But in a preliminary earnings statement, Spiegel predicted a $397 million net loss in fiscal 2001, compared with net earnings of $120.8 $3.08 billion.
And that isn’t all.
The firm’s stock is performing poorly, and the company has warned that it will report higher than expected losses on the sale of its troubled credit card business.
Spiegel’s credit unit, First Consumers National Bank (FCNB), began offering both private-label cards and bank cards to higher-risk markets in 1999. By January 2002, delinquency rates had reached 16%, Beder said.
That hurt revenue for the firm’s Newport News and Spiegel divisions, which relied on the FCNB credit card for 40% to 60% of their sales.
Then, as the delinquency rates skyrocketed, Spiegel got caught in a vicious cycle, not unlike that faced by Fingerhut:
It tightened credit restrictions, and its core customers bought less. “They’re trying to stop this cycle,” Beder said.
One way of doing that is to once again go after a higher-quality customer for both Spiegel and Newport News. The firm has made merchandising changes to support that initiative, a difficult task in a highly competitive market, and some observers doubt it will work.
“It’s a very mixed signal,” said Katie Muldoon, president of DM/catalog consulting firm Muldoon & Baer Inc., Tequesta, FL. “I don’t think there’s a clear point of differentiation that would give the consumer a reason to choose that brand.”
But family member Ted Spiegel disagrees.
Spiegel, the great-grandson of founder Joseph Spiegel, began work with the company as a youth and left the firm in 1987. He was part of the team that helped Spiegel successfully reposition itself as an upscale catalog for the busy working woman in the late 1970s and early ’80s.
“I heartily endorse their getting back to using a ZIP quality index to concentrate on a more narrow band of demographics, and being more targeted and less mass market,” he said. “I think that bodes well.”
A change in management following Spiegel’s departure brought a short-term strategy of higher volume and lower price points. The catalog’s appeal to women and its brand began to stand for less in the way of fashion and quality.
Meanwhile, the FCNB credit unit is fighting an effort to force it to divert $20 million a month in excess cash flow to repay note holders. FCNB won a temporary restraining order in April, preventing MBIA Insurance Corp., which insures FCNB’s payments to note holders, from requiring that diversion of funds.
“Spiegel already is in a precarious financial position,” wrote Joseph Serino, an attorney for FCNB, in court papers. “If Spiegel is denied these funds [a monthly distribution of up to $40 million from securities involving credit card receivables], it will not be able to pay its debts as they become due and will become insolvent.”
All of which adds up to a good case for Spiegel getting out of the credit business, which it is trying to do by selling FCNB. It is now in talks with interested parties. And it is also in discussions with the Office of the Comptroller of the Currency over the timing of its disposition of the bank and the terms and conditions under which the bank will operate during this period.
“The business risk and potential earnings volatility associated with the consumer credit and the capital requirements necessary to fund the business are not compatible with our efforts to establish The Spiegel Group as a strong, profitable retail company,” Chief executive Zaepfel said during a press conference in February. He also said that Spiegel was working with its bank group on a new financing arrangement.
The New CEO
And what of the new CEO? Is he another Hank Johnson, who helped transform Spiegel in the 1970s?
Zaepfel declined to be interviewed for this story, and is not active in talking to investors, according to Beder. But sources described him as a hard-charging, impatient leader who is determined to get the company back on track. Before transferring to Spiegel headquarters in Downers Grove, IL last July, he worked in Otto Versand’s home office in Hamburg, Germany.
There he served as deputy chairman of the board of directors and director of marketing and advertising. He joined Otto Versand, which had $21 billion in sales last year, in 1983 as vice president of merchandising.
When Zaepfel joined Spiegel, the position of office of the president was eliminated and the two men holding that job, Michael Moran and James Sievers, resigned.
Observers agree that Zaepfel has his hands full. Spiegel expects the loss on the valuation of its credit card business to be higher than previously estimated. That change will result in lower earnings in its annual report. The delay in filing the 10-K report prompted Nasdaq to change the firm’s trading symbol from SPGLA to SPGLE. The filing is required for continued listing of its stock by Nasdaq.
On news that Spiegel would miss its 2001 earnings estimates, the firm’s stock price plummeted as much as 63% to a 12-year low of $1 at one point.
The credit card business is not the only problem facing The Spiegel Group, which operates Eddie Bauer, Newport News, Spiegel and FCNB.
Eddie Bauer is said to have “lost its way” several years back by going too casual when the business-casual style gripped the nation, and then by going overboard in reversing itself to dressy.
“You would have thought that with the casualization of the workplace Eddie Bauer would have been a big winner,” Beder said. “But the styles were so casual that you couldn’t wear them to work.”
By the time it began bringing back the more traditional Eddie Bauer styles — attractive to its core demographic, 35- to 55-year-old men and women with household incomes of $75,000, marketing dollars were in short supply and it became tough to get the word out that things had changed. “The seeds are there for a turnaround, it’s just a function of building traffic,” Beder said.
Another issue eroding Spiegel’s business is the overall decline in catalog shopping, as women spend more time in malls where they can touch and try on clothing and eliminate catalog shipping and handling charges. A study of catalog use over the last three months found that usage declined to 35% from 42% in 2000, according to a study by WSL Strategic Retail.
“Spiegel doesn’t have a store business, so they are sitting there relying on catalogs when their competition for women’s clothing has a stronger presence in the mall,” said Candice Corlett, a partner with retail consultant firm WSL Strategic Retail in New York.
But Spiegel gets good marks for trying, and observers hope it will succeed. As Beder said, “It’s trying to get back to the glory days.”
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