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Vendors Debate Effects of Possible Macy’s Buyout

Vendors are watching anxiously as private equity firm Kohlberg Kravis & Roberts seeks to buy Macy's Inc. for $24 billion and take it private.

Vendors are watching anxiously as private equity firm Kohlberg Kravis & Roberts seeks to buy Macy’s Inc. for $24 billion and take it private.

Although turmoil in the debt financing markets may pose a major obstacle to KKR and help scuttle the offer, vendors are weighing the potential impact on wholesale business at what is for many their top account. Some said it could be an advantage to go private so Macy’s can weed out less profitable stores, so the vendors can build stronger businesses with the successful ones. In addition, they said Macy’s could move faster and make much needed changes as a privately held company.

Dan Brestle, chief operating officer of the Estee Lauder Cos. Inc., said his main question is whether KKR would leave competent management in place, including chairman, president and chief executive officer Terry Lundgren, whom Brestle considers a leader of vision. If that were the case, as he assumes, it could be easier for Macy’s to make necessary changes.

“This business model has to be tweaked; it has to be changed,” Brestle said. Since Lauder appears to be the biggest manufacturer operating in department stores, Brestle said he assumes the new owners “would respect that and partner with us to improve both the businesses.”

Diane von Furstenberg said, “I think Macy’s is a great asset…with great management. It will be very interesting to watch what happens.”

Bud Konheim, president and ceo of Nicole Miller, said vendors are all “holding their breath. Clearly, something is going on with KKR or the talk wouldn’t be out there.”

Macy’s operating model makes it difficult for a vendor to turn a profit selling to the chain because of demands on advertising, markdowns and price, Konheim said. Nicole Miller sells its line mostly to Bloomingdale’s, but is in select Macy’s units. Its licensed lines are distributed throughout the chain. “I think many vendors would welcome a change if it’s positive and results in a better way of doing business,” he said.

Warren Donner, president of WD-NY, a better sportswear firm, speculated that Macy’s might follow Lord & Taylor’s post-buyout strategy and cut the number of its divisions and stores by as much as half. He said the department store could consolidate divisions (combining Northwest into West, Midwest into North, and Florida into South) and sell off its less profitable stores.

“This could work to the benefit of the manufacturer and be an opportunity for people to do business with fewer stores,” Donner said. “Some of these D stores have 90 percent markdown rates — you don’t want to be in stores like that.”

WD-NY is trying to shrink the percentage of business it does with Macy’s to single digits, noting that its margin pressure and emphasis on private label can make it a tough environment for small vendors. The uncertainty of Macy’s future reinforces the urgency of that plan.

“I think it’s pretty scary because they are so big,” Donner said. “What’s happened to retail today is scary — there are so fewer stores to sell.”

Donner added that Macy’s could lose veteran talent in a buyout, which might affect relationships with vendors. “At $52 a share, a lot of employees who have been there for years are going to take their money and run,” Donner said.

KKR is looking to acquire Macy’s for $52 a share. There have been rumblings that the debt market might make it more difficult to complete some deals, partly because of the lingering effects of the subprime mortgage debacle. Neither KKR nor Macy’s has issued any statements.

Ira Ganger, president and ceo of the Amerex Group, a multilabel outerwear firm, said, “Over the last couple of years, Macy’s has gotten stronger and better and has a very effective leadership in place. It’s hard to say what a buyout would do to that success.”

Ganger continued, “I don’t think it would affect our [outerwear] business at all, as we have been growing significantly under the Jones New York label in missy and the Hydraulic label in juniors. As far as creating debt, capital companies normally go into these deals to let management run the business and find ways of growing the business.”

“Presently, I don’t think this will effect our business,” said outerwear designer Dale Dressin. “However, it sounds more like a real estate deal similar to Sears. These are not merchants interested in improving the bottom line. I can’t believe this will be good for business in the long term. Inevitably, it would appear that a chop up [of the company] would be likely.”

Laurence C. Leeds Jr., chairman of Buckingham Capital, said he saw advantages to Macy’s going private, as well as staying the course as a public company.

“KKR is a wonderful firm with a strategic outlook and great access to capital, with a long-term point of view and would be a worthwhile partner for Terry Lundgren,” he said. “On the other hand, Macy’s [formerly Federated Department Stores Inc.] has gone through the process once with considerable discomfort. They’re very comfortable being a public company. Terry and his management team are very adept, secure and good operators in a public environment. I know that their inclination and desire has certainly been to continue as a public company, and they’ve had the opportunity before to have gone private.”

Leeds thinks Macy’s will remain a public company.

“They’ve come so far in building their dream and establishing the country’s premiere retail institution,” Leeds said. “They may have short-term difficulties, but their long-term prospects are attainable down the road. Although there are potential great financial rewards in the short-term by going private, my bet is they’ll stay public.”