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New investor renews Hanover profit hopes

Hanover Direct hopes to return to profitability with a new controlling investor and "once a lot of the overhang of previous SG&A is done," president Tom Shull said last week.

He made his remarks during the company's third-quarter conference call, which came a day after it announced a recapitalization agreement with Chelsey Direct LCC and Regan Partners LP.

The proposal will give Chelsey Direct a majority equity and voting interest.

During the analysts' call, Shull said the Internet businesses for the first nine months grew 28 percent to $79 million, and are also now 28 percent of its revenue base, said Ed Lambert, cfo. (Charles Blue has since replaced Lambert in that position.)

"The Internet is still where the opportunity lies," said Shull, and the company will continue to revamp its Internet sites, work with on-line affiliates such as Amazon and other strategies. He was "enthused" with the prospect of its relationship with Amazon.com, though it hasn't seen any significant results yet.

The company overall experienced a year-to-date sales decline of 7.4 percent, or $305 million. The catalog sales continue to decline, Lambert said, because of the company's strategy to cut back on unprofitable circulation as well as "softness in demand for our products."

Shull added, "Had we, for example, circulated at the levels in 2000 in Domestications, we would have lost this year alone another $10 million of EBITDA." Its previous circulation strategy was "flawed" he said, and "we're hoping that prospecting will recover somewhat as the consumer confidence continues to recover." However, he noted that it is unlikely that prospecting will get back to its 1999 and 2000 performance, when it was extremely positive on the top line.

Now that the mergers and acquisitions market is recovering along consumer confidence, Hanover Direct executives said during its third-quarter conference call that the company is once again pursuing buyers for its non-core assets such as Gumps, Silhouettes and International Male.

"The window of opportunity is much better than it has been to sell these non-core assets to get significant value," Shull said.

"We do have an issue with scale and focus with a number of our brands," Shull said later in the call. "Its not a brand equity problem as much as it is scale and focus." Its Company Store brand, however, does have "scale and focus," and Hanover will concentrate its resources there, as the catalog "continues to perform well."

Under Hanover's new agreement with Chelsey Direct LCC and Regan Partners LP, Chelsey Direct would exchange its preferred stock for new issues of preferred and common stock. The new common shares will have an effective issue price of 69 cents per share.

Shull stated the proposal provides strong economic benefits for common stock shareholders by, among other things, "aligning the interests of all parties to permit the continued turnaround of the company."

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