EDDIE BAUER CASE
1. What is Eddie Bauer's strategy upon emerging from bankruptcy? What are the key successes and risk factors associated with this strategy?
Spiegel Inc. sold its Catalog and Newport News divisions reorganized the company to establish Eddie Bauer Holdings, Inc., which would operate as an independent company. Thirty million shares of Eddie Bauer common stock were issued to the former Spiegel’s creditors. They took several strategic steps to reorganize the company. They want to revitalize their reputation as a premium brand for the “modern outdoor lifestyle” and increase profitability by increasing traffic and sales per square foot by re-sizing its stores ...view middle of the document...
This largely increases their debt amounts and I would be concerned about their ability to repay this as they struggle to get out of bankruptcy and because the company is funded through debt more than equity. While the other side of the equation increases their deferred tax assets, if the company is not able to be profitable, they will not be able to utilize these deferred tax assets and still carry a large amount of debt. Also, Eddie Bauer took on Spiegel’s pension and employment liabilities, which further increases their total amount of liabilities in a time where they should not be increasing this part of their balance sheet. Also, in their reorganization plan they are focusing on increasing sales per square foot when many of their rent agreements have some sort of percentage of sales portion in the rent agreement, therefore, focusing on making the stores smaller may not increase the bottom line by as much as they would like it to. A lot of their reorganization plan depends on the fact that they think they are going to be able to increase sales, which may not happen due to economic factors that are out of their control.
2. Where in the financial statements are these success and risk factors reflected? Are there any accounting adjustments needed to better reflect the firm's economic reality?
None of the successes can be found in the “fresh start” balance sheet, as they have not had time to have an impact yet. The risk factors can be seen in the company’s 2005 “fresh start” balance sheet with the increases in the new term loan, pension and employment liabilities as well as the increases to goodwill and other intangible assets and the deferred tax asset. I think that the $267 million increase in goodwill and other intangible assets is meaningless and does not reflect the firm’s economic value as it simply represents reorganization values in excess of amounts identifiable to specific assets. Also, the deferred tax asset as estimated from the projected net operating losses is only of value to the company if they are able to make positive profits after their bankruptcy. If you think of the balance sheet assets as values of items waiting to get transferred to the income statement to generate revenue, these items provide no meaning to the economic value of the company as they may or may not be worth anything to the company. These assets overinflate the perceived economic value of the company.
3. How has the company performed in the past? What key measures can be used to gauge the company's success?
The company’s net income seems to be very volatile. Just looking at the income statement for years 2002-2004, the net income ranges anywhere from (thousands) $6,737 to $51,541 just in those three years. It appears as though during these years the company has been doing a good job in controlling their cost of sales and their selling, general and administrative expenses. However, looking at their...