INTERCO
HBS Case Study : Interco 9-291-033
• Started out as shoe company – been around a long time
• Business has spread to other consumer products / services through acquisitions
• Fairly conservative financially, debt level is relatively low
• Interco has moved away from apparel and general retail (went from 59% to 40% of total sales)
• Placed more emphasis on the footwear division. (acquired Converse in 1986)•
• Placed much more emphasis on the furniture division (sales rose from 20-33% of Interco’s total sales)
Current Scenario
• Cheap imports hurting profitability of U.S. apparel manufacturers
• Retailing industry profits reduced due to drop-off in consumer spending and deep discounting programs being offered by retailers in 1987
• Furniture and home furnishings prospects appear bright given favorable demographic trends in family formations (success of firms like Home Depot proved this ex post!)
• October 1987 stock market crash still in rear-view mirror
Operations
Currently has four major divisions
1. Apparel (e.g., London Fog)
2. General retail merchandising (Central Hardware)
3. Footwear (Converse, Florsheim)
4. Furniture and home furnishings (Ethan Allen)
Interco's Goal
• Improve long-term sales and earnings growth
• Earn increased return on assets and equity Concern
Interco concerned stock price may be undervalued
• Management felt that bad performance in apparel group is unduly dragging down Interco’s stock price.
• Because of this “undervaluation,” Interco’s management afraid may be a takeover target.
Action taken by Interco
Following 1987 crash, Interco’s board authorized repurchase of 5 million shares (by end of fiscal 1988 over 4 million shares had been repurchased – over 10% of the equity)
7/15/88 Interco announces reorganization plan
–sell the apparel division that is dragging down rest of company
–take the money raised from this sale and return it to shareholders (via special dividend or repurchase)
Raise of new
• Started out as shoe company – been around a long time
• Business has spread to other consumer products / services through acquisitions
• Fairly conservative financially, debt level is relatively low
• Interco has moved away from apparel and general retail (went from 59% to 40% of total sales)
• Placed more emphasis on the footwear division. (acquired Converse in 1986)•
• Placed much more emphasis on the furniture division (sales rose from 20-33% of Interco’s total sales)
Current Scenario
• Cheap imports hurting profitability of U.S. apparel manufacturers
• Retailing industry profits reduced due to drop-off in consumer spending and deep discounting programs being offered by retailers in 1987
• Furniture and home furnishings prospects appear bright given favorable demographic trends in family formations (success of firms like Home Depot proved this ex post!)
• October 1987 stock market crash still in rear-view mirror
Operations
Currently has four major divisions
1. Apparel (e.g., London Fog)
2. General retail merchandising (Central Hardware)
3. Footwear (Converse, Florsheim)
4. Furniture and home furnishings (Ethan Allen)
Interco's Goal
• Improve long-term sales and earnings growth
• Earn increased return on assets and equity Concern
Interco concerned stock price may be undervalued
• Management felt that bad performance in apparel group is unduly dragging down Interco’s stock price.
• Because of this “undervaluation,” Interco’s management afraid may be a takeover target.
Action taken by Interco
Following 1987 crash, Interco’s board authorized repurchase of 5 million shares (by end of fiscal 1988 over 4 million shares had been repurchased – over 10% of the equity)
7/15/88 Interco announces reorganization plan
–sell the apparel division that is dragging down rest of company
–take the money raised from this sale and return it to shareholders (via special dividend or repurchase)
Raise of new