Sunday, July 11, 1999
Can anyone save Gibson Greetings?
Card company needs a strategy to lift stocks and sales
BY LISA BIANK FASIG
The Cincinnati Enquirer
Three years ago, the few analysts who followed Gibson Greetings were content in thinking a cowboy could rescue this long-beleaguered card company. These days, they're not sure he can save himself.
In the staid, consistent industry that creates America's greeting cards, that's what incoming Chief Executive Frank O'Connell was — a cowboy. Exuberant and highly energetic, the smiling CEO stormed Gibson with both guns blazing.
Bam! Bam! Bam! A rapid fire of fresh ideas blasted from his new creative teams: alternative card lines for teens, a risky marketing approach and funny little beanbags that talked.
In an industry whose concepts and innovations were collecting cobwebs, where the greeting card aisle was the domain of middle-aged women, Mr. O'Connell was wild and woolly.
Wall Street took notice, and was willing to bet the executive's risks would pay high. Within months, analyst coverage of the company multiplied. Firms that never gave Gibson a thought were suddenly throwing loads of money into it.
“The gentleman in charge now seems to be exactly what they need,” Rick Berry, an analyst with Murphey, Marseilles, Smith & Nammack, said at the time.
But over time, a posse of problems caught up with Gibson. Waning consumer interest, retail indifference and oppressive competition pulled the horse out from under Mr. O'Connell and his company.
In April, Gibson warned its investors that first quarter and annual earnings would fall significantly short of plan. Shares dropped more than 33 percent to the $6 range and haven't recovered. In a statement of regret, Mr. O'Connell conceded “certain components of our strategy simply aren't working in this increasingly competitive environment.”
The company pledged to closely examine all of its operations, released more than 100 workers, abandoned the toy business outside of its Silly Slammers beanbags, and then bunkered. A move to Northern Kentucky has been indefinitely postponed, and Gibson's annual meeting twice rescheduled — it's now dated Aug. 26. Shareholders have yet to see a complete proxy with issues to be voted upon.
Mr. O'Connell has been vacationing and could not be reach for this story. But James Wilson, the company's chief financial officer, said last week that Gibson's focus has not changed: It strives to stimulate consumer interest in greeting cards, and does so through continued development of alternative lines.
“We're concerned about the decline in unit volume,” Mr. Wilson said. “We need to be able to counteract that. We need to get consumers to buy cards, and to do that, we need to give them product that they want.”
To continue in the card industry, Gibson has to tunnel into the aisles of major retailers. And it has to win over fickle, time-strapped consumers.
Analysts and investors think Gibson's concepts are good and necessary considering how tough the card industry is. But they wish it would change some things, such as Mr. O'Connell's status as noninvestor in the company.
Some wonder if Gibson would sell itself to a larger competitor.
“In fairness, I think they have done some of the right things. This was a very sleepy company,” said David Fondrie, an analyst in Heartland Advisors, once a major investor in Gibson. “Time will tell if he can be successful in a really competitive industry.”
Breaking into the oligopoly
Gibson is not alone in its problems. The greeting card industry for some time has been scrambling to regain lost sales caused by declining consumer interest.
Forget cruising for the elusive perfect card. Many shoppers have begun substituting card purchases with e-mail, cell phone calls and pagers. Card companies are trying to make up for declining sales by raising card prices. Gibson began raising its prices in the fall.
“Unit sales are down because people are changing the way in which they communicate with one another,” said Jeff Stein, an analyst with McDonald & Co. Securities. “(It's) affecting all card companies.”
But Gibson's position as No. 3 in an industry dominated by Hallmark and Cleveland-based American Greetings makes it especially vulnerable to consumer trends because it has a harder time gaining exposure. Gibson is more likely to be squeezed out of the most-visited stores as its competitors demand exclusivity.
“The real problem for a company like Gibson is distribution,” said Roger Blackwell, a marketing professor at Ohio State University and a retailing consultant. “Unfortunately for Gibson, both Hallmark and American Greetings have been fairly successful in establishing their own niches.”
Hallmark, for instance, managed to land Wal-Mart while also selling through its own well-known specialty stores. But Gibson has had the misfortune of losing some of its major accounts, such as Phar-Mor and Woolworth's, to bankruptcy or similar misfortune.
Gibson for years has tried to fit into this oligopoly as best it could, which often meant fighting for its 7 to 8 percent market share. Mr. O'Connell wanted that and more, and immediately upon arrival in 1996 set to shifting product and distribution methods.
He introduced new words to the contented card-industry lexicon, such as “entertainment” and “relationship-building.” Meanwhile, his management teams formulated a new merchandising system and eschewed standard upfront fees and other trade terms expected by retailers.
It got attention. Whitney George, a portfolio manager with investor Royce & Associates Inc. in New York, said his firm followed Mr. O'Connell into Gibson because it liked his energy and ideas.
“We became excited,” he said. Gibson never interested Royce before.
At the time, it was exciting. In its first 18 months with Mr. O'Connell, Gibson introduced its hugely popular Silly Slammers beanbag toys and several card lines for baby boomers and Generation Xers.
A program called “Relativity” was developed to usher Gibson into more doors by packaging its top alternative lines with brands from other vendors. Its progress is yet undetermined, but consumer behavior experts like the alternative card concept.
“I think greeting cards have a reputation for being for middle-aged ladies, and that was the dominant market for some time,” said Meryl Gardner, a marketing professor who studies buyer behavior at the University of Delaware. “The card companies have not really recognized all the nuances, and all the integrity that we need.”
A twofold problem
The most dramatic shift in Gibson's operations occurred in 1998, when it closed its manufacturing plant and began farming out work to contractors who could offer more printing options and faster product turnaround.
From the beginning, followers of the company said the closing was necessary for Gibson to reduce expenses and remain competitive.
“I think they had to do it. Their business (was) shrinking,” said Eric Bosshard, an analyst with Midwest Research Maxus Group in Cleveland. “(They) had to reduce cost structure.”
But perhaps the outsourcing could have been better handled. In October 1998, shares fell 40 percent on news the card maker's annual earnings would come in below plan. This was in part because a delayed holiday shipment worth $20 million created a loss in the third quarter.
Then in April, Gibson executives told analysts it expected significantly lower earnings in the first quarter and for the year. The company said it did not meet the sales needed to pay off expenses related to acquisitions and a shift in production mix.
Gibson's twofold problem existed before Mr. O'Connell came along: declining card sales and an inability to land large accounts. As Mr. George put it, quoting Warren Buffett: When a great manager meets a mediocre business, the business always prevails.
Now, a third problem has emerged: a bargain-basement stock. Shares are trading at less than $7 each. Four months after Mr. O'Connell joined Gibson, it was trading at around $20.
In May, Bennett LeBow, chief executive of cigarette maker Liggett Group, purchased a 5.01 percent stake in Gibson to influence business decisions at the card maker.
Gambling on strategy
So now investors and followers of Gibson wait for word on what it will do to remain competitive.
Some have suggestions. Almost all analysts and investors think Frank O'Connell and other corporate executives should independently be holding shares in their company. Presently, none of Gibson's executives outside of Senior Vice President Gregory Ionna own shares that are not options.
“That's the type of thing that if we were at the (shareholders) meeting, we would raise the question,” said Mr. Fondrie, with former investor Heartland Advisors. “If the management of the company has confidence in the business, they sure should own the stock, especially while it's undervalued.”
Investors also wonder why Gibson doesn't buy back some stock, since it is at below book value. In the past, Gibson held off because it was considering acquisitions.
Mr. Wilson said there are other uses for the cash. As for executive investments, “Each individual makes that decision on their own,” he said.
Then there is the idea that Gibson can be a takeover target itself. American Greetings twice made overtures at Gibson and twice was rebuffed. Its last offer, in spring 1996, equaled $18 a share.
But Mr. George of Royce & Associates wonders if Mr. O"Connell wouldn't be more inclined to take Gibson private and turn it around.
Mr. Wilson and American Greetings declined to comment on talks of acquisition.
But if Gibson remains independent, it is going to have to change the way American consumers think so it can increase unit sales, or it will have to change the way it operates.
It's a gamble. Bailing out of toys will help Gibson focus on cards. And investments in an e-greetings company will help it diversify and develop brand equity in a new venue. But Mr. Wilson said Gibson still wants to remain in mainstream retail — despite declining unit sales.
He seems confident Gibson has enough cowboy left in it to capture a market.
“If we can counter (consumer disinterest), we can get the units back to where they should be,” he said. “We want to provide the best product out there.”
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