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  Can a wizard's spell save kitsch merchandiser Enesco?

BENJ GALLANDER and BEN STADELMANN

Saturday, November 25, 2000

Enesco Group Inc. (ENC--NYSE) is a stock that has been on our watch list since last year when it began a long slide from its traditional trading range around the $30 (U.S.) mark. It hit bottom in May at $3.81. The Itasca, Ill., company distributes collectable figurines and assorted giftware merchandise to retailers and other mass-market channels.

With a product list of more than 10,000 items, the company has seen many fads come and go over the years, but nothing compares to the astounding impact of Pottermania. In July, a licensing deal was signed with Warner Brothers, the unit of Time Warner Inc. that is developing a movie based on the best-selling books by J.K. Rowling, who has a huge hit with the Harry Potter character. From its beleaguered level below $5 the stock ran up to $13.44 in the span of four days. It suddenly was trading at daily volumes in the millions, dwarfing its previous average of about 73,000. The euphoria was short-lived, however, and the stock quickly gave back most of its gains to settle at its current trading price of $5.68.

Hype of this magnitude has been reserved of late for mobile Internet devices, but Harry Potter is an unprecedented publishing phenomenon. So far the children's fantasy series has sold more than 30 million copies worldwide, and dozens of companies are selling an array of merchandise. Enesco has ventured into a large, but very crowded market.

So far, orders for the Potter stuff have been modest, and have done little to arrest a deep sales slump at Enesco. Revenue for the first nine months of this year are running at $230 million, compared with $297 million for the same period last year. Most of the damage is the result of the two main lines: Precious Moments figurines are off 17 percent this year, and Cherished Teddies have been slashed by 45 percent.

It may be kitsch, but historically Enesco has made a bundle selling these things. As with Beanie Babies, the company periodically "retires" popular items, to support price appreciation on the secondary market for collectors. The products are made cheaply in the Far East and profit margins have been fat -- around 46 percent. This fuelled a steady dividend of $1.04 a share until it was eliminated in April. Shortly after that president and chief executive officer Jeffrey Hutsell quit, and his position has yet to be filled.

The problem is that the collectibles industry is in a serious decline, the public apparently having satiated its appetite for cutesy merchandise. The explanation for this decline is unclear. Are we getting less sentimental? A more likely reason is that collectors are becoming discouraged that their hordes of plush toys and figurines are not quite the enduring "investment" they were cracked up to be.

Enesco is positioning itself to try to reinvigorate revenue by mass-marketing more mainstream products to retailers like Wal-Mart Stores Inc. and Toys "R" Us Inc. It remains to be seen what kind of margins can be realized in this new market.

When an organization is adopting a new sales strategy, it's a strong signal to be cautious before throwing funds in the firm's direction. That is why we are adopting a wait-and-see attitude.

The best-case scenario is that the Potter film does boffo box office next summer, as kids flock to flesh out their literary idol. The spinoff merchandise is obviously essential to sales, but a hot product can go further. It could help Enesco win the fierce battle for shelf space, stemming the deterioration of its established products and providing a wedge for new ones.

Before the stock spiked this past summer, insiders were active buyers. With the stock price again depressed, we are watching this indicator closely. Ultimately though, the key will depend on who the new CEO is. For us, hiring a turnaround specialist at the top would be a louder buy signal than the blare from the Harry Potter bandwagon.

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