Federated Department Stores, Inc today quantified the impact of the credit delinquency problem at its Fingerhut subsidiary. The company said the impact on second quarter EBIT (earnings before interest and taxes) in its direct-to-customer business segment is expected to be approximately $150 million, which would reduce earnings by 43 cents a share on a fully diluted basis.

James M Zimmerman, Federated's chairman and chief executive officer, said the company is taking steps to address Fingerhut's credit delinquency situation, but anticipates that it will take time to rectify the problem. In the interim, increased reserves for bad debt will be required and, combined with anticipated lower catalog sales due to a tightening of credit, there is a potential for lowering EBIT in the direct-to-customer segment by an additional $200-250 million in the Fall season, Zimmerman said. He added that 2001 is expected to show significant improvement.

"We are taking this situation very seriously. We believe we understand the problem, we know what caused it and we are aggressively taking steps to fix it," Zimmerman said. "We are making numerous changes that we believe will have a significant positive impact on future credit profitability, although we expect these changes will negatively impact mail-order catalog sales in the short term. At the same time, it is important to emphasize that this situation does not reflect on the performance of our department stores, which are the essential core of Federated's business and which, despite recent weakness in apparel sales, remain strong."

Ronald W Tysoe, Federated vice chairman, said the company has moved responsibility for Fingerhut credit operations to Federated's Financial and Credit Services (FACS) Group, where it now reports to chairman and CEO James J Amann. "The primary objective is for FACS and Fingerhut to bring their respective expertise to bear on this situation - FACS with its understanding of revolving credit and Fingerhut with its understanding of the lower-income customer - and to work together to maximize pre-tax profit for the business as a whole," Tysoe said.

Based on Federated's review of the situation over the past two weeks, Tysoe said four key factors have been identified as negatively impacting Fingerhut credit delinquencies as of the June period. These are:

  • Conversion from closed-end installment to revolving credit, which Fingerhut began in the fall of 1998.
  • Implementation of late fees, with what now appears to be an inadequate provision for write offs.
  • Aggressive deferred-credit offerings for newer customers beginning late last year.
  • Economic conditions, including higher interest rates and gas prices, that are beginning to make it harder for lower-income customers, who benefited from increased credit availability in recent years, to meet credit obligations now.

In addition to moving the Fingerhut credit operation under FACS, Jeffrey Sherman, chairman of the Federated Direct division that encompasses Fingerhut and the company's other direct-to-customer catalog and e-commerce businesses, said the following steps have or are being taken to reverse the trend of increasing delinquencies and improve the Fingerhut credit picture:

  • Increase collections activity.
  • Lower credit lines and tighten initial granting of credit to reduce bad debt exposure.
  • Introduce new credit scoring criteria for moving credit lines up or down.
  • Initiate aggressive address verification practices for all new accounts.
  • Reduce deferred credit offerings and introduce a minimum-purchase requirement for deferred credit.
  • Revise billing statements to highlight Fingerhut name and reduce confusion as to the origin of the statement.

Sherman predicted a potential negative short-term sales, but emphasized that the objective is to maximize cash flow and pre-tax profits. "I am confident that over time we will be able to solve this credit problem and deliver the desired financial results, albeit on a potentially lower Fingerhut sales base," Sherman said.