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Would Eddie Bauer Shop Here?

Posted: May 01, 2008 14:11 PM by Will Ashworth

Tickers in this Article: GIS, EBHI

Following its preliminary Q1 report, which was released April 18, Eddie Bauer Holdings (Nasdaq:EBHI) CEO, Neil Fiske, referred to the quarter as "challenging". Same store sales were up by just 0.5%, compared to 9.5% for the same period last year, suggesting that the store may not have the same following that it used to. That got me to thinking; if Eddie Bauer (the late founder) were alive today, would he shop at the retail store that bears his name?

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Eddie and His Legacy
When Eddie Bauer created his store in 1920, times were much simpler. Bauer was an avid sportsman and the store gave him the opportunity to be close to his passion. In 1936, he invented the down parka, which he called the "Skyliner." It would receive a patent in 1940. During the war, Eddie Bauer made sleeping bags and flying suits for the government, each of which bore the Eddie Bauer logo; it was the only company permitted to do so. Sales would boom as a result. Unfortunately, the war took a toll on Bauer and he sold the company to William Niemi (his friend and fishing pal) in 1949. He bought back 50% in 1953 and sold out permanently in 1968. Since that time, the company has had several owners, including General Mills (NYSE:GIS) and Spiegel. The Eddie Bauer company emerged from Spiegel's bankruptcy in 2003 as an independent company, and traded on the pink sheets until 2006, when it obtained a Nasdaq listing. (For related reading, see The Dirt On Delisting.)

What's Wrong at Eddie Bauer?
There are a few reasons why EBHI has fallen out of favor recently. For starters, many shoppers feel that the quality of the products at Eddie Bauer has begun to suffer. I agree: I got two Eddie Bauer shirts for Christmas this year and after one wash, they both completely lost their shape. The tag read, "Made in China". Now, before you assume that I'm bashing the home of the Summer Olympics, please note that I couldn't care less where a company makes its products as long as they are well made. In my experience, this isn't the case at Eddie Bauer. In fact, I worked briefly for Eddie Bauer in the 1990s. At that time, the company understood quality. It seems this is no longer the case. In addition, very few employees who worked for the company during the successful 1980s and '90s are still with the company. (For more on the move to lower quality, lower cost products, see The Disposable Society: An Expensive Place To Live.)

Some of the blame can also be place on company management. Eddie Bauer hired hot-shot CEO Fabian Mansson, who previously worked for H&M (STO: HMB.ST), to save the company in 2002. Mansson resigned in 2007 and has been replaced by Neil Fiske, formerly of Bath & Body Works. Fiske's compensation in 2007, combined with Mansson's severance, totaled $8.3 million. That's a lot for a company that lost $32.5 million before tax on total revenues of $1.04 billion in fiscal 2007. (For more insight, read Evaluating Executive Compensation.)

Preliminary net merchandise sales results for Q1 showed that same-store sales were up 0.5%; internet and catalog sales were up 0.3%. Total net merchandise sales were down to $198 million - 0.9% lower than they were in the same quarter of 2007. But how much did the company lose? That's an important question. We'll know soon enough when the full first-quarter one report is released in May.

Mr. Fiske Wants Us To Trade Up
If you read Eddie Bauer CEO Neil Fiske's 2004 book, "Trading Up: Why Consumers Want New Luxury Goods ... And How Companies Can Create Them", it is clear that Fiske believes that people will trade up (spend more than usual) for certain things they are passionate about. For instance, you save money on groceries and household items by shopping at Wal-Mart, but golf at a very exclusive country club. It seems we're all willing to bend the rules a little. Fiske wants to position Eddie Bauer to take advantage of this by returning to the company's roots. Outdoorsy men were once the company's bread and butter. Unfortunately, the company moved away from this in recent years - I can say with some certainty that Eddie Bauer wasn't selling watermelon-colored golf shirts in its heyday.

Bottom Line
Fiske's strategy boils down to hiring the best people possible and letting them merchandise the "Eddie Bauer" way. If the company succeeds, I think they'll be back on top in no time. Until then, I'm afraid the man who invented the down parka wouldn't recognize the company he founded and would just walk on by.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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