February 28, 2002, 12:00 AM

Fingerhut becomes un-Federated

Federated Department Stores is cutting Fingerhut loose, after paying $1.9 billion to acquire it only three years ago. A potential buyer surfaced after Federated said it would shut down the operation.

When Federated Department Stores Inc. bought Fingerhut Cos. Inc. in 1999 for $1.7 billion, the rationale seemed sound, even though the fit between the upscale Federated and middle market Fingerhut raised eyebrows. In the dot-com frenzy, some companies believed they had to do anything to get online. Fingerhut had a web site and, from its catalog background, a fulfillment operation. Federated did not.

But how quickly that $1.7 billion evaporated. Federated announced in January it will shut down Fingerhut. “There is no longer strategic value to Federated in retaining Fingerhut’s operations, and we have no expectation these businesses would contribute meaningfully to the company’s future financial performance,” James M. Zimmerman, chairman and CEO, said in a statement.

While the excitement of the Internet may be past, its importance as a strategic tool is not, and some analysts argue that Federated could be hurting itself in the long run. “Given Federated’s poor results overall, it becomes a case of a retailer deciding where there are easy cuts to make,” says Jim Okamura, a partner at J.C. Williams Group’s retail practice in Chicago. “But I’ve got concerns with retail companies making drastic online cuts because they may be losing the longer-term e-commerce opportunities.”

But near-term survival may be more important to a retailer in Federated’s situation than long-term opportunities. “Federated is in a stick-to-the-knitting situation,” says Duif Calvin, vice president of the Global Retail Practice of Scient Inc. “Federated understands its priority has to be its department stores, which is 98% of its business.”

When it announced the sale in January, Federated was pessimistic that it would be able to sell Fingerhut. In the meantime, a couple of potential buyers have surfaced, but nothing concrete had developed as of mid February.

The disposal of Fingerhut is yet another move by Federated to back away from e-commerce. It announced in the fall that it is virtually closing down Bloomingdales.com and scaling back Macys.com (see Internet Retailer, Jan./Feb. 2002, p. 8). “Federated has outstanding brick and mortar brands. But right now those brands need close attention,” Calvin says. “Federated can’t afford to be running two different businesses.”

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