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The Spiegel Group Reports Fourth Quarter and Full-Year 2001

From: ASAP

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The Spiegel Group today reported results for its fourth quarter and fiscal year ended December 29, 2001. The company also announced that it has implemented a plan to sell its credit card business, including its First Consumers National Bank subsidiary (FCNB), as part of a broader strategy to focus increased resources to its retail business and to foster consistent earnings growth.

"We have made a strategic decision to remove the credit card operations from our business mix to intensify our focus on our core retail business and strengthen our financial position," said Martin Zaepfel, vice chairman, president and chief executive officer of The Spiegel Group. "Offering credit to our customers will continue to be an important service. As part of this transaction, we will form a relationship with a third-party to provide private-label credit card programs to our customers."

For the fourth quarter 2001, the company reported earnings from continuing operations of $18.1 million, or $0.14 per share, compared to earnings from continuing operations before the cumulative effect of an accounting change of $22.4 million, or $0.17 per share, in last year's fourth quarter. In addition, the company reported a total loss from discontinued operations of $396.3 million, or $3.00 per share, in the fourth quarter of 2001, compared to earnings from discontinued operations of $42.9 million, or $0.33 per share, last year. The loss from discontinued operations in 2001 primarily consists of an estimated loss on the sale of the credit card business. The amount of this charge is based on current expected market valuations and could vary significantly (up or down) based upon the market for the credit card business and other factors surrounding the transaction.

For the year ended December 29, 2001, the company reported a loss from continuing operations of $17.8 million, or $0.13 per share, compared to earnings from continuing operations before the cumulative effect of an accounting change of $8.9 million, or $0.07 per share, for fiscal year 2000. The company also reported a loss from discontinued operations for the year of $379.8 million, or $2.88 per share, compared to earnings from discontinued operations of $116.0 million or $0.88 per share, last year. The loss for the 2001 fourth quarter and year was primarily attributable to the estimated loss recognized on the anticipated sale of the credit card business and a reduction in the gains on the sale of accounts receivables.

For the year ended December 29, 2001, revenue from continuing operations decreased 8 percent to $3.079 billion from $3.346 billion for the comparable period last year. The revenue decline was driven by a 9 percent drop in net sales, which includes a 15 percent decline in comparable-store sales at Eddie Bauer.

The company reported fourth quarter EBITDA from continuing operations of $71.7 million compared to $80.5 million in the fourth quarter of 2000. For the 2001 fiscal year, EBITDA was $93.9 million compared to $136.3 million for last year's comparable period.

As a result of its 2001 financial performance, including the estimated loss recorded in the fourth quarter for the disposition of its credit card business, the company is not in compliance with certain of its 2001 loan covenants. The company stated that it is currently working closely with its bank group and its majority shareholder to restructure its credit facilities.

Zaepfel stated, "We have strong support from our majority shareholder and are confident that we will be able to secure the necessary financial support. Our goal is to have new financing arrangements in place by mid-April. In the interim, with the support of our majority shareholder, we have adequate liquidity and cash flows to fund our day-to-day operations. Additionally, the anticipated sale of the credit card business will reduce our debt and capital requirements."

Results From Continuing Operations

Earnings from continuing operations include results of the company's retail brands - Eddie Bauer, Newport News and Spiegel Catalog - as well as related support operations. The company's earnings from continuing operations for the fourth quarter 2001 were $18.1 million, or $0.14 per share, compared to earnings from continuing operations before the cumulative effect of an accounting change of $22.4 million, or $0.17 per share, for the fourth quarter of 2000.

Total revenue from continuing operations for the quarter declined 13 percent to $1.012 billion, from $1.164 billion for the fourth quarter of 2000, as lower customer response in each of the company's merchant companies negatively impacted net sales.

The decrease in net sales for the quarter reflects a 15 percent decline in direct sales and a 14 percent drop in retail store sales. E-commerce sales continued to show positive growth, achieving a 22 percent sales increase, offset by a 22 percent decrease in catalog sales. The retail store sales include a 20 percent decline in Eddie Bauer's comparable-store sales, offset somewhat by sales growth in its outlet stores.

Zaepfel said, "Our fourth quarter results were extremely disappointing and although the economic downturn clearly impacted our ability to stimulate sales, weaknesses in our merchandise offer and marketing programs also contributed to the lackluster sales performance, particularly in our Eddie Bauer division. During the fourth quarter, we planned for Eddie Bauer's new brand positioning and revamped product offer to deliver higher sales productivity. While expectations were lowered based on the difficult economic conditions, customer acceptance was obviously lower than expected."

The company noted that despite lower than expected sales, Spiegel Catalog achieved higher earnings in the fourth quarter while earnings from Eddie Bauer and Newport News declined compared with the fourth quarter of 2000.

The gross profit margin as a percent of net sales decreased in the fourth quarter to 38.9 percent from 39.6 percent in the year-earlier period. Strong margin growth achieved by Spiegel Catalog during the quarter was more than offset by lower margins at Eddie Bauer and to a lesser degree Newport News. Higher markdowns and incremental marketing promotions negatively affected Eddie Bauer's margins.

Selling, general and administrative expenses as a percent to total revenue increased by 80 basis points to 40.2 percent for the quarter. While expenses were reduced by 11 percent compared to last year's fourth quarter, lower sales productivity across the merchant divisions negatively affected the company's ability to leverage operating expenses.

Results From Discontinued Operations

Because The Spiegel Group intends to sell its credit card business, financial results from the business and the estimated loss on the disposal of the business are shown as discontinued operations.

The company reported a net loss of $85.7 million, or $0.65 per share, from discontinued operations for the fourth quarter of 2001, reflecting the company's loss from its private-label and bankcard credit card operations and a charge to reduce the net gains on the sale of receivables. In last year's fourth quarter, net earnings from discontinued operations were $42.9 million, or $0.33 per share. Higher charge-offs negatively impacted the credit card business in the fourth quarter, particularly in the private-label credit card programs. As a result, net gains on the sale of receivables were reduced by $78 million in the fourth quarter to reflect the weakness in the portfolio performance.

Zaepfel stated, "In 1999 and 2000, during a stronger economic period, the company aggressively grew its credit card accounts, which included extending credit to higher-risk market segments. At the same time, we adopted a 'risk-based' pricing policy to match credit pricing with the level of risk. In the fourth quarter of 2000, in response to rising delinquencies and charge-offs in our private-label credit card programs, we began implementing actions to strengthen our credit portfolio and reduce charge-offs. These actions included implementing more restrictive underwriting policies, more aggressive collection efforts and selectively re-pricing certain segments of the portfolio. However, the economic downturn, which began in mid-2000 and accelerated in 2001, combined with the high account growth that was heavily weighted toward higher-risk accounts, resulted in a rapid deterioration in our credit portfolio and a significant earnings shortfall."

In discontinued operations, the company also has recorded an estimated net loss on the sale of its credit card business of $310.5 million, or $2.35 per share. The estimated loss on the disposition of the credit card business is primarily related to three components: 1) loss on the disposition of assets based upon independent valuations 2) operating losses from the measurement date (end of December), to the expected date of sale (second quarter 2002) and 3) other disposition expenses. These estimates are based on current market valuations and could vary depending on market conditions and the final structure of the transaction.

2002 Initiatives

Commenting on the company's initiatives for 2002, Zaepfel stated, "Our key initiatives for 2002 are sharply focused on refining and enhancing the positioning of each of our brands, achieving productivity gains and improving gross profit margins. Securing earnings growth and stability while maximizing cash flow are our highest priorities."

Eddie Bauer is taking steps to analyze and better understand customers' perceptions of its brand and product offer. The company has engaged a strategic consultant to conduct a comprehensive evaluation of Eddie Bauer's market competitiveness and brand positioning. The results of the detailed study are expected to be available by the end of the first quarter. The findings from the study will guide the company in revamping its merchandising and marketing initiatives. Management will react quickly to these findings and expects to have meaningful changes in place in time to favorably impact fourth quarter 2002. In the meantime, Eddie Bauer has a number of initiatives underway aimed at reducing markdowns, increasing margins and improving store productivity. As part of its plans to achieve higher sales productivity, the company will continue to close under-performing stores as it evaluates lease renewals and other opportunities. For 2002, Eddie Bauer expects to close approximately 45 apparel stores and open 5, for a net reduction of 40 apparel stores.

Spiegel Catalog has refined its brand positioning and is working to ensure that its merchandising and marketing strategies are tightly synchronized with this positioning. Spiegel Catalog's merchandising and marketing strategies are focused on increasing spending among its existing customers and reducing its dependency on credit programs to drive sales. Increasing the relevance of its product offer, particularly in its apparel offer, is a key component of this plan.

Newport News has a number of initiatives underway to elevate its brand profile in order to appeal to a higher-income, less credit-dependent customer. While holding firmly to its value positioning, Newport News will execute merchandising strategies to broaden its price points, thereby increasing its average selling unit value, expanding its customer base and enhancing profitability.

Financial Outlook for 2002

Commenting on expectations from continuing operations for the 2002 fiscal year, the company stated that revenue is planned to be relatively flat to slightly down compared to last year, showing a decline in the first half of the year followed by a modest improvement in the second half of the year. The company stated that it has implemented strategies and tactics aimed at improving its fiscal year 2002 earnings, with most of the improvement expected to be realized in the second half of the year. However, due to the pending sale of its credit card operations it will not provide specific earnings guidance for the full year at this time.

Commenting on expected results from continuing operations for the first quarter of 2002, the company stated that based on current business trends, it expects first quarter sales to decline approximately 10 percent and earnings to fall below 2001's first quarter results. Nevertheless, the company stated that for the month of January, sales decreased 8 percent and its earnings from continuing operations exceeded its plan and January of 2001. For the first quarter of 2001, the company's loss from continuing operations was $19.4 million, or $0.14 per share.

Conference Call Information

The company will make available comments on its financial results for the fourth quarter and fiscal year 2001 and its initiatives for 2002 today at approximately 5:00 p.m. Eastern Time. Investors can either call 888-203-1112 (international callers use 719-457-0820) and enter passcode 798534 or visit the Earnings Overviews and Presentations section of the company's Web site at thespiegelgroup.com. The pre-recorded call will be accessible from February 21 through March 7, 2002.

This press release contains statements that are forward-looking within the meaning of applicable federal securities laws and are based upon Spiegel, Inc.'s current expectations and assumptions. Words such as "expect," "plan," "believe," "anticipate," and similar expressions identify forward-looking statements. Any such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Potential risks and uncertainties include, but are not limited to, factors such as the financial strength and performance of the retail and direct marketing industry, the company's ability to sell its credit card business and restructure its credit facilities, changes in consumer spending patterns, dependence on the securitization of accounts receivable to fund operations, state and federal banking laws and regulations, risks associated with collections on the company's credit card portfolio, interest rate fluctuations, postal rate increases, paper and printing costs, the success of planned merchandising, advertising, marketing and promotional campaigns, and other factors that may be described in the company's filings with the Securities and Exchange Commission.

The Spiegel Group is a leading international specialty retailer marketing fashionable apparel and home furnishings to customers through catalogs, more than 580 specialty retail and outlet stores, and e-commerce sites, including eddiebauer.com, newport-news.com and spiegel.com. The Spiegel Group's businesses include Eddie Bauer, Newport News, Spiegel Catalog and First Consumers National Bank. The company's Class A Non-Voting Common Stock trades on the Nasdaq National Market System under the ticker symbol: SPGLA. Investor relations information is available on The Spiegel Group Web site (thespiegelgroup.com).

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