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Finding a Suitor for J. Jill: Urban Outfitters Is Seen As Candidate to Buy Firm

Specialty retailer J. Jill is said to be for sale, and Urban Outfitters Inc. is among the potential suitors, sources said.

NEW YORK — J. Jill Group, the multichannel specialty retailer of women’s apparel, is for sale and Urban Outfitters Inc. might be among the potential buyers, financial and market sources said.

J.P. Morgan Chase is said to be the investment bank circulating the prospectus, or book, containing financial information about the retailer’s operations, which include retail, catalogue and the Internet. A banker for J.P. Morgan declined comment.

The asking price for J. Jill could not be immediately determined. Analysts and portfolio managers often use a one-times sales formula that provides an estimated price per share. An analyst’s estimate of $513 million in sales for fiscal year 2006, divided by 21 million shares outstanding based on the firm’s most recent quarterly report, would bring in a per-share price of $24.40. Using the sales volume of $454 million from fiscal year 2005, would give a lower per-share range of $21.60. Shares of J. Jill closed Tuesday at $17.57, up 63 cents, in over-the-counter trading.

“We’ve heard that,” Urban Outfitters chief financial officer John Kyees said when asked about a purchase of J. Jill. “There’s been no discussion. We constantly get these suggestions from market people about the possibility for acquisition. We’ve never done an acquisition for 35 years, but you never know.”

An executive at Urban Outfitters, who asked not to be identified, said the company “thinks J. Jill is an interesting business.” In addition to its core nameplate, Urban also operates the Anthropologie and Free People retail concepts.

Olga Conley, the cfo of Quincy, Mass.-based J. Jill, could not be reached for comment.

The idea of J. Jill and Urban connecting appeared to have originated with Marvin Traub, the former Bloomingdale’s chairman who heads Marvin Traub Associates Inc. He suggested the firms might be a good fit. “Both companies have a very dedicated customer base across the country,” Traub said. “Each has a different age group, but there’s a kind of casualness that seems to fit both companies.”

A financial source not connected with either retailer, but familiar with the rationale behind why Urban might want to buy J. Jill, said: “Urban can fine-tune the merchandise at J. Jill and have another channel for customers who have outgrown Anthropologie. They can take the best from Free People and Anthropologie and incorporate it into J. Jill.”

The source added, “When you look at Gap Inc.’s new Forth & Towne concept, you can see that the age 35-plus market is very competitive.” The source also noted that, while Chico’s FAS targets a 55-plus consumer, there is no retailer that really caters to the 40-plus shopper and J. Jill could fill that niche.

Tapping new markets has been the phrase du jour for many specialty chains. Pacific Sunwear is launching a third retail brand, One Thousand Steps, a multibrand shoe and accessories concept aimed at 18- to 24-year-olds. It already operates PacSun and D.e.m.o. Limited Brands is testing a new beauty format — Bigelow — as well as an innerwear format, Pink. Aéropostale Inc. just unveiled Jimmy’Z this summer, and Polo Ralph Lauren is set to slowly expand its Rugby concept.

Abercrombie has found success at its teen concept Hollister. Chico’s previous concept, Pazo, geared toward 25-to-35-year-old women, failed, but the chain is testing Soma, an intimate apparel and sleepwear concept. Chico’s also expanded through its acquisition of the White House|Black Market chain in July 2003.

Because J. Jill operates in multiple channels, and Urban already has a similar structure with its own retail, catalogue and Internet operations across its retail concepts, an acquisition by Urban would be accretive to Urban’s earnings, particularly once productivity is improved, such as the usage of Urban’s distribution center in South Carolina for J. Jill’s and Urban’s operations, a Wall Street analyst said.

Another name that surfaced as having some interest in J. Jill is Liz Claiborne, buy- and sell-side analysts said. A Claiborne spokeswoman declined comment.

Neely Tamminga, senior research analyst at Piper Jaffray & Co., on Aug. 19 downgraded shares of J. Jill to “market perform” from “outperform,” on the basis of a “softer-than-anticipated selling environment.”

She noted that the direct side of the business at J. Jill has been erratic, although she pointed out in her research note that management has “done a better job lately in reducing catalogue circulation to bring down the cost structure of the direct division.” She added that the lead times on the catalogue are not tight enough to react to near-term slowing sales trends.

Tamminga said in an interview Tuesday that she had no knowledge about the possibility of a sale of the company. However, she added: “We believe there is a place for J. Jill in the Baby Boomer market for the customer out there who wants a specialty store environment with uniquely designed product using natural fibers. J. Jill has done a better job with each delivery this year and is speaking to her more clearly.”

The Piper Jaffray analyst said J. Jill’s retail growth prospects are significant.

“The company is growing their store base to about 190 by yearend compared with 150 stores at the end of last year. We are encouraged that they have many stores left in their retail expansion,” she said.

Tamminga estimated the business, over time, can support at least a 500-unit store base.

Urban Outfitters and Anthropologie have plenty of square footage growth ahead, and Free People is beginning to slowly expand, Brian Tunick of J.P. Morgan Securities Inc. said in a research noted dated Aug. 11. The analyst said he expected Urban to possibly test another concept next year and roll it out in 2007.

“While both of Urban’s divisions continue to both define and dominate their respective niches, we will be watching to see if new competition from Abercrombie & Fitch’s Ruehl, American Eagle Outfitter’s yet-to-be-named concept and others begin to try to capture some of the 18- to 35-year-old wallet that Urban has had to themselves,” Tunick wrote.