FINGERHUT TO CUT 550 JOBS
Byline: David Moin / With contributions from Jennifer Weitzman
NEW YORK — Federated Department Stores Inc. has decided to hang onto its dragging Fingerhut subsidiary, but will drastically downsize it and more selectively extend credit to Fingerhut customers in an effort to run the catalog and e-commerce business more profitably.
Federated said Friday that 550 Fingerhut positions — almost a quarter of the staff — will be eliminated through 350 layoffs this month and in January, and by not filling 200 vacancies. Cuts are across the board, but mostly in the key Minnesota facilities, including the Minnetonka headquarters, the Plymouth data center and the e-commerce office in Edina. Some staff in merchandising, creative, marketing, finance and human resources areas will also leave.
About $75 million to $100 million will be spent on the downsizing in the current fiscal year ending Feb. 3, 2001, but $40 million in annual overhead expenses should be saved, starting in 2001.
“After looking at all the options, our focus is creating a viable but much smaller Fingerhut,” said James Zimmerman, chairman and chief executive officer of Federated. “We are going to downsize and run a smaller, profitable, cash-flowing business. We’ve decided not to liquidate it. That would be a bad business decision. Right now, we’re focused on making
Zimmerman also said that “significant changes” on extending and limiting credit, as well as changes in catalog content and mailings, would reduce sales, requiring expense savings. Delinquency problems are largely traced to Federated’s credit policies, though delinquencies have stabilized at around 21 to 22 percent, Federated said, and are better than expected.
Investors approved of the decisive Fingerhut restructuring, sending Federated shares up $3.31, or 12.8 percent, to close at $29.25. In effect, the reaction to Friday’s news erases the downward pressure on Federated’s stock when it disclosed the scope of the Fingerhut problem on July 20. That disclosure sent shares to a 52-week low of $21, with the stock later rebounding to close at $23.50. Federated began the week of July 17 at $29.50, slightly above Friday’s close. The 52-week high is $53.88, reached on Jan. 11.
Federated bought Fingerhut, the third-largest cataloger in the country, for $1.7 billion in February 1999, propelling Federated deeper into the catalog and cyberspace arenas with bigger fulfillment capabilities, and broadening the merchandise offerings to moderate and budget prices.
Analysts said the acquisition was strategically sound, providing new business potential to complement Federated’s department store empire, though the execution has been lacking. One big problem has been shifting Fingerhut’s credit policies from closed-end installment to a more department-store style of issuing revolving credit, with separate late fee penalties and aggressive deferred-credit offerings for newer customers. The lower-income customer has also been more strapped by worsening economic conditions, including higher fuel prices.
Daniel Barry of Merrill Lynch said in a research note that the downsizing of Fingerhut “is a wise decision” as a result of the credit delinquency problem that surfaced in the second quarter. “It happened on Federated’s watch,” Barry said. He added that it made no sense for Federated to sell Fingerhut since Federated couldn’t do it without losing critical fulfillment, data processing and data mining components.
Michael Exstein, of Credit Suisse First Boston, said Federated “acted aggressively” in dealing with Fingerhut, and could not have not foreseen the impact of shifting credit policies.
In addition to the one-time costs, the company will take a non-cash write down of goodwill and other assets of $740 million ($680 million after taxes) in the third quarter, which ends Oct. 28. Included in that estimate is $60 million from Fingerhut’s Internet investments.
Operating losses of $20 million to $70 million in the direct-to-customer segment are seen for the fall season. In addition to Fingerhut, Federated Direct operates the Bloomingdale’s By Mail, Macy’s By Mail, macys.com and bloomingdales.com direct-to-consumer catalog and electronic commerce businesses. Fingerhut also has the Arizona Mail Order, Figi’s and Popular Club catalogs. They will be relatively unaffected by the restructuring.
With Federated’s department stores outperforming the industry, Zimmerman projected improved earnings in 2001, in the range of $4.00 to $4.25 a share. Long-term, the goal is earnings-per-share growth of 13 to 15 percent. Federated’s department stores account for more than 90 percent of the retailer’s $17.7 billion in sales.
In addition to tightening credit standards, Fingerhut will produce a smaller e-commerce site and a smaller catalog with fewer mailings, fewer stockkeeping units, “a more targeted” concentration on better-paying customers and continued lower-to-moderate prices.
Other e-commerce sites owned by Fingerhut will be integrated into fingerhut.com or discontinued. These include myjewelry.com, outdoorspirit.com, atomicliving.com and andysauction.com. The andysgarage.com Web site will be retained for a short term for liquidating closeout goods. Fingerhut will de-emphasize non-retailing activities, such as business-to-business fulfillment services and its e-commerce equity investment strategy.
Fingerhut core catalog sales are expected to be $850 million to $1 billion this year, compared to $1.4 billion for 1999. Total Fingerhut sales in 2001 are seen at $1.6 billion to $1.75 billion, reflecting double-digit growth at Arizona Mail Order, Figi’s and Popular Club, and double-digit declines at the Fingerhut catalog. Bloomingdale’s and Macy’s combined catalog and e-commerce sales are planned at $200 million to $250 million.
EBIT earnings in the direct-to-consumer segment are estimated between $25 million and $100 million, including $40 million in overhead expense savings from Fingerhut’s downsizing.