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Spiegal Group Earnings

From: ASAP

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The Spiegel Group today announced financial results for the third quarter ended September 29, 2001. The company reported a loss of $12.3 million, or $0.09 per share, compared to earnings of $13.5 million, or $0.10 per share, for the comparable period last year. Third quarter earnings were consistent with previous guidance.

"While our third quarter results were disappointing, earnings were in line with guidance provided in early September, despite the business impact of the tragic events on September 11," said James R. Cannataro, executive vice president and chief financial officer of The Spiegel Group. "Consumer spending has clearly been affected by these events, adding further stress to an already uncertain retail environment. Our third quarter results reflect sales weakness in each of our merchant companies as well as higher charge-offs in our credit operations.

"In planning holiday season demand, we took a conservative approach in our inventory commitments. We expect the retail environment to remain challenging during the fourth quarter. As a result, we have intensified marketing promotions and will continue to tightly manage expenses," he said.

Operating income declined $45.0 million for the quarter, including a $37.3 million decrease in the merchandising segment (which includes the retail operations and private-label credit business) and a $7.6 million decline in the bankcard segment.

Total revenue for the quarter fell 13 percent to $703.8 million, reflecting an 11 percent decrease in net sales and a 37 percent decrease in finance revenue.

Net sales for the quarter included a 13 percent decline in direct sales and a 7 percent drop in retail store sales. E-commerce sales continue to outpace the overall sales trend, posting a 42 percent increase, offset by a 22 percent decrease in catalog sales for the total direct business. The decline in retail store sales includes a 15 percent decrease in Eddie Bauer's comparable-store sales, offset somewhat by sales growth in its outlet stores.

The change in finance revenue for the quarter reflects a $29.2 million, or 67 percent, decline in revenue from the private-label credit card business and a $7.5 million, or 13 percent, decrease in bankcard revenue compared to last year. The drop in finance revenue was due to slower receivables growth compared to last year, lower retained-interest income from securitized receivables, a decrease in net pretax gains from the sale of receivables, and the impact of actions taken immediately following the tragic events on September 11.

Due to the interruption in postal service and the impact on people's lives, the company's credit card bank, First Consumers National Bank (FCNB), extended its grace period for assessing finance charges and fees to avoid unfairly penalizing customers. FCNB backdated payments received the week following the terrorist attacks and waived certain fees, including late-payment fees. In addition, FCNB temporarily suspended outbound marketing programs and collection activities following the terrorist attacks.

For the quarter, the yield on receivables was even with last year and average receivables serviced rose 24 percent. However, the rate of growth slowed due to the decline in credit sales and aggressive actions taken by the bank to tighten its credit underwriting policies, particularly in the private-label credit programs. In addition, higher charge-offs reduced the earnings performance of the private-label credit card business, resulting in lower retained-interest income (or excess cash flows) from the securitized receivables. In addition, the company reported net gains on the sale of receivables of $10.6 million in this year's third quarter compared to $15.5 million in the same period last year. The incremental gains reported in the third quarter primarily reflect anticipated improvement in the revenue yield in the bankcard portfolio. In the private-label credit portfolio, net gains were reduced to reflect the expectation of higher charge-offs. (See the attached schedule of supplemental information for a breakdown of the net gains.)

The gross profit margin as a percent of net sales decreased to 34.2 percent for the third quarter from 36.0 percent in last year's third quarter, primarily due to higher markdowns and additional marketing promotions at the company's Eddie Bauer division.

With a heightened focus on tightly managing costs, the company reduced its selling, general and administrative expenses (SG&A) by 7 percent for the quarter compared to last year's third quarter. However, as a percent to total revenue, SG&A expenses increased 280 basis points reflecting decreased expense leverage due to lower sales. Aggressive cost-cutting initiatives in the company's Eddie Bauer division resulted in improved expense leverage during the quarter. However, lower sales productivity on catalog circulation in its Spiegel and Newport News divisions and higher charge-offs in its private-label credit operation hindered expense leverage.

For the nine-month period, total revenue decreased 7 percent to $2.279 billion from $2.441 billion last year. The company reported a loss of $19.5 million, or $0.15 per share, for the nine months ended September 29, 2001, compared with earnings of $59.5 million, or $0.45 per share, before the cumulative effect of an accounting change, for the comparable period last year.

Outlook

Commenting on the company's outlook, Martin Zaepfel, vice chairman, president and chief executive officer of The Spiegel Group, said, "Each of our merchant companies and our bank are focused on actions that will improve earnings performance in the fourth quarter. At the same time, we are developing merchandise strategies aimed at improving sales productivity and reducing the reliance on credit marketing programs to drive sales. Each of our merchant companies will continue to enhance its brand positioning by better aligning its product offer with customers' needs and strengthening its price/value equation. In addition, we will continue to take actions to strengthen the quality of our credit card portfolios.

"Eddie Bauer debuted its new brand positioning and apparel offer in stores on September 5, but the terrorist attacks hampered our ability to get a clear read on initial customer response. We have seen improving sales trends in other areas of Eddie Bauer's business, such as direct sales and Eddie Bauer Home, however, comparable-store sales in the apparel business have fallen short of our expectations. In response, we have intensified marketing programs focused on increasing store traffic in the fourth quarter. Eddie Bauer has a strong holiday offer and I am confident that as mall traffic builds during the busy holiday season, sales will strengthen," Zaepfel said.

Earnings Guidance

The company noted that it is particularly difficult to forecast sales and earnings in this environment of unprecedented world events and economic uncertainties. The company stated that it is revising its previously issued guidance for the fourth quarter ending December 29, 2001, due to the weaker than expected economic environment and further uncertainty about consumer confidence and spending. The company currently expects earnings for the fourth quarter to be in the range of $0.25 to $0.30 per share, compared to earnings of $0.50 per share in last year's fourth quarter. Total revenue is expected to be down 5 to 10 percent for the quarter compared to last year's fourth quarter, with guidance of negative low-double digit comparable-store sales for Eddie Bauer.

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