Fingerhut IPO: Some business is booming

Every month brings a fresh cascade of data offering conflicting and often contradictory readings on the overall health of the economy.

Here's a new one that proves more telling than most: The re-emergence of Fingerhut, the Minnetonka catalog company that made a name for itself, and a fortune for investors and top executives, lending money and selling stuff to the most credit-challenged consumers in the United States.

It's been a decade since most Minnesotans even heard of Fingerhut, which was sold in 1999 for almost $2 billion. After many near-death experiences, it's back with a new management team, a new parent company, Bluestem Brands, and a sales pitch -- "We often say yes when others say no. Get the credit you deserve!" -- that's resonating with a new generation of consumers.

Bluestem's sales soared 19 percent last year, to $521 million. The company added nearly 600,000 new credit accounts, and its average order grew 8 percent, to $180. Noncash charges for stock and warrant conversions resulted in a net loss, but a key metric -- earnings before interest, taxes, depreciation and amortization -- grew 24 percent, to $78 million.

Now Bluestem is hoping to raise $150 million through an initial public offering of its stock. Company officials declined to discuss its business or the stock offering, citing the "quiet period" companies must observe before selling shares to public investors. But one person cheering its return is Love Goel, who was chief operating officer of Fingerhut when it was sold to Federated Department Stores.

"We proved you could build a $2 billion business serving customers that other retailers didn't, and the reality is that nobody else has taken that space," said Goel, who is now CEO of a retail private equity firm, GVG Capital Group, that has no financial interest in Bluestem.

Bluestem is as much financial services company as it is retailer, and one of the fastest-growing financial services segments is, ironically enough, serving people who don't have access to traditional financial services.

These are the customers Bluestem wants. At the end of 2010, the weighted average credit score of customers who owed it money was 612, deep into subprime territory. Last year, Bluestem charged off 16.5 percent of its customers' debt, down from 22 percent two years earlier but still sky-high compared with the likes of Capital One Financial, which has a charge-off rate of less than 5 percent on its credit card portfolio.

Bluestem offsets this risk with low credit lines (39 percent were under $500 last year) and a high, fixed interest rate of 24.9 percent interest rate on Fingerhut purchases, and either 14.9 or 19.9 percent on purchases made at Gettington.com, another site it launched two years ago to woo younger customers with better credit histories.

It also charges higher prices. Bluestem's gross margin was 47 percent last year, while Macy's was 40 percent. In real-life terms, that means a first-generation iPad with the maximum amount of memory lists on Fingerhut for $749, payable in 20 installments of $46.99, and on Gettington.com for $679. That's bout $20 less than a second-generation iPad now available at Best Buy or directly from Apple.

Consumer advocates might howl "rip-off," but Goel, for one, defends Bluestem's approach.

"It's not like there is someone else willing to sell an iPad to this customer for $46.99 a month," Goel said. "It's a question of what product is the vendor willing to give Fingerhut, and what is the reasonable financial risk of selling it."

The Fingerhut that was sold to Federated was a sprawling empire with 9,500 employees, multiple catalogs and websites that featured innovations, such as daily deals and flash sales, that were in some respects ahead of their time.

Bluestem is smaller, with 850 employees and one distribution center, in St. Cloud. The management team of old is long gone, replaced by a group of credit card, retail and financial services veterans. The company still mails millions of catalogs every year, but 44 percent of its sales occur online, up from 25 percent in 2008.

An offering price has not been determined for Bluestem's shares, but one group that's looking especially forward to Fingerhut's return as a publicly owned company are the creditors of convicted and bankrupt fraudster Tom Petters. He helped buy what was left of Fingerhut in 2002, and now owns about 21 percent of Bluestem's shares. That stake is now under the control of the bankruptcy trustee, Doug Kelley.