As business risks go, buyer's remorse is one that corporations would really rather avoid.

        AT&T dumped NCR after realizing that telephony, not computers, was its cup of tea. Viacom sold Blockbuster Entertainment when synergies with the video retailer failed to pan out. Chrysler gave Daimler-Benz a nasty bout of mental anguish — and billions of dollars in losses.

        Next, it could be Federated Department Stores' turn to reverse directions — by jettisoning its Fingerhut direct-sales unit. The Cincinnati-based department store chain last month repeated the possibility of selling Fingerhut. One thing is certain: Federated won't get anywhere near the $1.7 billion it paid for it just 30 months ago.

        “If they can find someone to buy it, that'd be great, bottom line,” said Lee Backus, an analyst with Buckingham Research Group in New York.

        They were unlikely bedfellows to begin with. The upscale Federated must have wondered what it had gotten into with save-a-buck Fingerhut. Extending new, Bloomingdale's-like credit terms to its working-class clientele, Fingerhut wound up with a fourth of its business in arrears. Moreover, Fingerhut's e-commerce strategy, banking on the likes of andysgarage.com, collapsed during the Internet meltdown of 2000.

        Federated paid dearly for its lapse in buying judgment. Plant closings, Web site shutdowns, layoffs and asset write-downs stripped almost $1 billion from Federated's profits for the year ended Feb. 3. The biggest chunk of that — $673 million — was a goodwill devaluation, in essence a concession that Fingerhut was worth 40 percent less than its sticker price.

        One more possible repercussion awaits: Five lawsuits were filed by Federated shareholders upset by the stock's steep price drop. Over the course of last year, the stock fell from $50 to $35, a 30 percent decline. The lawsuits, which seek unspecified damages, are pending.

        Having undergone the knife, Fingerhut is profitable again, but at the cost of a 40 percent drop in sales in the first six months of 2001. Karen Hoguet, Federated's chief financial officer, said the company will ponder Fingerhut's future in the fourth quarter.

        “Our first objective is to stabilize Fingerhut and get credit under control, then see what options we have, whether it's growing it or selling it,” Ms. Hoguet said in a conference call with investors Aug. 15.

        Analysts, although encouraged by Fingerhut's rebound, sense that the company's days as a Federated unit are numbered.

        “I doubt the catalog business will be part of the core company long-term,” Steven Kernkraut of Bear, Stearns in New York said.

        Said Mr. Backus, “There's very little synergy between their low-end catalog business and their department stores.”

Not a fun job

       At Fingerhut's headquarters in the Minneapolis suburb of Minnetonka, Michael Sherman is beginning his second year as Fingerhut's president. The job hasn't been fun, as it fell on Mr. Sherman to shrink the business and sign off on more than 2,000 pink slips. More than anything, Mr. Sherman is charged with ensuring that more cash comes in than goes out.

        In a company that welcomes less credit-worthy, low- to moderate-income earners — also known as the subprime market — double-digit default rates by customers don't come as a shock. The subprime crowd, after all, generates 75 percent of Fingerhut's profits. And to many of those order-by-mail folks, Fingerhut's no-frills catalogs and Web site are the places to shop.

        Mr. Sherman essentially rationalized the operation. Three Web sites were closed, and three others were rolled into Fingerhut.com. Instead of shotgunning catalogs to every name and address it could lay its hands on, Fingerhut became more selective. The company also produces fewer catalogs and far fewer colors and sizes of the same products.

        “We want to target our mailings to people who want to buy from us,” Fingerhut spokesman Ben Saukko said. “We want to send them the right offerings. If they buy camping gear from us, we won't send them a catalog with women's lingerie. If they have $100 of credit with us, we won't send them a catalog with offerings of over $100.”

        Mr. Saukko said the program has yielded favorable results. Federated, though, said second-quarter delinquency rates are still hovering at 19 percent to 20 percent. It also reported that Fingerhut's doubtful-account set-asides have grown from 31 percent of net receivables a year ago to 38 percent as of Aug. 4.

        Ms. Hoguet attributed the rise in delinquency rates to the falloff in sales. She said Federated expects post-shake-up Fingerhut to generate as little as $1.3 billion in sales in 2001, down from $1.8 billion last year.
       

Loosening credit

        That's not to say Fingerhut isn't trying to spur sales. In its September catalog, the company is offering a four-month deferred payment to its credit-card customers. Mr. Saukko said credit terms are being eased in a controlled manner.

        “Obviously, when you limit credit, sales are affected,” he said. “So now we're trying to loosen up the tourniquet and let some blood into the arms so the arms don't fall off.”

        With unemployment claims at a nine-year high and consumer confidence flagging, the likelihood that Fingerhut will resume a growth track anytime soon is debatable.

        For instance, Sherry Chiger, editorial director of Catalog Age, said value-priced outlets such as Fingerhut will be more immune to recession. But Ray Schultz, editor of Direct magazine, which serves the direct-sales industry, said Fingerhut's customers will be more vulnerable.

        “By definition, these people are going to be suffering more than upper-middle-class customers like those at Bloomingdale's,” Mr. Schultz said. “I'm skeptical that the market will be ready at the end of the year for a big sales push.”

        Differences on Fingerhut's recession-resistance aside, the two editors agree that Fingerhut will be a survivor.

        “Fingerhut's got a pretty good position in the market,” Mr. Schultz said. “There are a lot of people marketing to that audience, but not for that length of time and with that degree of trust.”

        Ms. Chiger said Fingerhut, under Mr. Sherman, is taking the right steps.

        “I think they realized rather quickly that they needed to be good old Fingerhut,” she said.

        Federated won't say if it's actively shopping Fingerhut to buyers, but analysts and industry observers don't think a sale will occur soon. In fact, Fingerhut's $37 million in operating profits this year has been one of the bright spots in a down year for Federated's department store sector.

        “There's no reason to have a fire sale at a time when the stock market is depressed,” Mr. Backus of Buckingham Research said.

        Added Gerald Hirschberg of Standard & Poor's Corp., “I don't think it's a decision Federated has to make right now. Fingerhut is not a business that's hurting them.”

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