Spiegel, the parent of Eddie Bauer stores and cataloguers Spiegel and Newport News, filed for bankruptcy protection today. The company listed assets totaling $1.73 billion and liabilities of $1.70 billion, which leaves about 12 bucks in stockholder's equity -- OK, OK, it leaves $30 million, but it may as well be 12 bucks as, in bankruptcy proceedings, stockholders will likely end up with a steaming hot cup of jack squat.
The news won't come as a shock to those following the company's recent, and not so recent, events. The retailer has been in poor financial straits for some time now, having its shares delisted by Nasdaq in June '02.
In January, the Securities and Exchange Commission sued the company because it failed to pass on material information to shareholders, specifically relating to its auditor's comments during 2002. The comments questioned the company's ability to continue as a going concern (an important tidbit of information, one might say). Spiegel settled the suit in February without admitting any wrongdoing.
The vultures really began circling last week, when Spiegel announced it would be forced to file for bankruptcy protection if unable to secure immediate financing. Despite the myriad issues within the firm, Spiegel's credit card lending practices were ultimately responsible for the company's demise. It was attempting to grow its credit card division in order to prop up declining sales of its merchandise, but sacrificed credit quality in its desire for growth, using loose credit standards to add cardholders.
As might be expected in an environment where consumer debt is at an all-time high, the practice ultimately led to extreme charge-offs. Even more importantly, the charge-offs exceeded levels agreed upon in Spiegel's lending covenants. This forced the company to immediately pay back investors who purchased $2.2 billion worth of the retailer's bonds, which were backed by the deteriorating credit card receivables.
In order to continue operations during bankruptcy proceedings, Spiegel has secured $400 million of debtor-in-possession (DIP) financing from Bank of America
Thankfully, the firm stated the funds would allow it to continue providing the same high-quality goods and services it always has -- you know, the goods and services that just forced it to seek bankruptcy protection.
This situation should be a warning to investors in companies with large credit card portfolios. Credit quality, charge-offs, and loan-loss reserves are always important, but they're especially important in a weak economy, when the devil in the details often comes to collect his due.