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Barneys’ New Future: Istithmar Wins Chain and Rollout Seen

Let the Barneys expansion begin. Dubai-based investment fund Istithmar finally won the bidding for the specialty retailer on Thursday.

Let the Barneys expansion begin.

Dubai-based investment fund Istithmar finally won the bidding for the specialty retailer on Thursday after rival Fast Retailing Co. Ltd. of Japan decided to drop out. As reported, Istithmar will pay Jones Apparel Group, Barneys’ parent, $942.3 million in the all-cash deal. According to Jones, the deal is expected to close in the third quarter of this year.

Now the fund faces the task of earning its investment back — and it already has indicated that will be via store openings mainly in the U.S. and, perhaps eventually, overseas.

“We are excited to acquire Barneys New York,” said H.E. Sultan Ahmed Bin Sulayem, executive chairman of Istithmar, in a statement. “Barneys is a unique global asset with incredible growth prospects within the luxury market. We look forward to working with Barneys as both a financial and strategic partner. We intend to grow the company in the U.S. and in international markets.”

David Jackson, chief executive officer of Istithmar, added in a telephone interview: “What is attractive about Barneys is its terrific management team and their tremendous longevity across all major positions. Our thoughts [are] to support the management team in executing its business plan in the U.S. market….We are talking about other things to further capitalize on the strength of the management team.

“It’s a collaborative effort with management,” he emphasized.

Howard Socol, ceo of Barneys, will stay on, as well as members of his team. Socol signed a new employment agreement with Istithmar in June. Specifics of the agreement were not disclosed.

“Istithmar and the emirate of Dubai have a long-term perspective for Barneys and the value creation it is capable of. They are big believers [in Barneys],” said Marc Cooper of Peter J. Solomon Co., the investment banking firm advising Istithmar.

Barneys is about ready to launch its flagship in San Francisco, with a Las Vegas flagship set to open a few months later, said Jackson.

When asked about Barneys perhaps having a larger online presence, Jackson said the “Web site would be an opportunity for them to do more business online….The online business is an opportunity to reach new markets and further enhance the brands.”

But, while many analysts believe Istithmar wants to expand Barneys internationally, at least for the moment that isn’t a priority. Jackson on Thursday reaffirmed what he said in a June interview about his firm’s plans for Barneys: There are international opportunities for the retailer down the road, but the real growth for now is Stateside.

That coincides with Jones’ original plan for Barneys, which focused solely on a domestic strategy where the belief is there were still untapped possibilities in the U.S. And, while former Jones ceo Peter Boneparth has said Barneys could have $1 billion in sales, that, too, is based on projections for a domestic operation, sources familiar with the plan said.

Sources also said that, while the company recognized international possibilities, Jones as early as last year was already set on eyeing expansion of the Barneys Co-op format and flagship sites in locales similar to San Francisco and Las Vegas.

Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates, considers Barneys ripe for further expansion, both domestically and internationally.

“Barneys has been pursuing a very thoughtful and successful strategy of perfecting its core competencies of catering to aspiring luxury customers in the contemporary genre, where they’ve carved out their customer niche,” said Aronson. “They’ve started to show they can develop separate business models catering to that kind of customer,” both domestically and abroad, he added.

During Jones’ ownership, Barneys flagships opened in Boston and Dallas last year, and a new store in Seattle replaced a smaller one there this summer. Aronson said a flagship in Las Vegas will open early next year, and one in Scottsdale, Ariz., in 2009.

“They’ve proven they can do a modified flagship in selective cities. These are selective opportunities that start to add up, when you look at the worldwide situation,” he said.

In addition, he said the Co-op has been able to “segment off” into a very specialized, hot merchandise category. There are currently 14 Co-ops, and these can be rolled out in the U.S. “to up to 40 to 50 stores over time,” said Aronson. He said there is potential for Co-op stores to open selectively on an international basis, as well.

But even with more flagships and Co-op locations, is Barneys worth close to $950 million? Certainly both Istithmar and Fast thought so. The Dubai fund inked an initial deal with Jones in June for $825 million, but then Fast stepped in with an offer of $900 million and a bidding war ensued.

After Istithmar matched the $900 million offer, Fast on Sunday raised the stakes a second time by upping its cash offer to $950 million, but that proved to be as high as it was willing to bid. The dollar amount of the current deal between Istithmar and Jones is $7.7 million lower than the $950 million offered by Fast, but it nets Jones $27.3 million more since there’s no break-up fee component in the Istithmar agreement. Had Fast submitted a new topping offer and had Jones accepted it, Jones would have been obligated to pay Istithmar a break-up fee of $34.7 million, much higher than the $22.7 million initially agreed upon in June.

Richard Kestenbaum, partner at investment banking firm Triangle Capital LLC., said, “A buyer justifies the high valuation based on the expansion of the proven concept. The risk is that luxury stops being the place where the market is moving toward.”

The banker said that one way to recoup one’s investment is to build more flagships because that’s where the retailer makes its money. But he’s also talking about flagships smaller than the Barneys on Madison Avenue in New York and not too far away from Neiman Marcus stores. Kestenbaum believes the two can coexist because Neiman’s is more classic American, while Barneys is more edgy European. However, Neiman’s is increasingly pushing into the contemporary and denim areas that Barneys has long focused on, and also has launched a format, Cusp, aimed at competing with Co-op.

But it’s not only increasing competition that Istithmar has to worry about with Barneys. The new owner also needs to hope that the seemingly insatiable demand for luxury, contemporary and premium denim will roll on, and so far, the prognosis is good.

Dana Telsey of Telsey Advisory Group believes luxury brands will continue to grow. “The awareness for luxury brands is greater than ever. More nationalities are buying luxury goods,” she said.

The emerging international customers from Eastern Europe, India and China are making a huge impact and make up an enormous market for spending, Telsey noted. “The luxury market totaled $150 billion worldwide annually in sales. It is expected to grow 6 to 7 percent annually for the next five years.”

She noted Barneys has cachet merchandise and name-brand awareness. In the U.S., its flagships will work best in a market with good tourist traffic and wealthy demographics, she concluded.

Frederick Schmitt, an investment banker at the Sage Group, believes the contemporary market is still very strong. “Based on demographics, there’s a lot of very wealthy people out there and we don’t see that changing. The demographic trends support continued growth.”

Schmitt noted Baby Boomers and younger generations tend not to be attracted to department stores, which is why specialty chains have been growing very quickly, and Barneys fits the age demographic. “Baby Boomers and those younger are more willing to spend money on apparel and accessories than their parents,” he said.

Analyst Jennifer Black of the firm that bears her name said the changing demographics are such that offerings in contemporary and premium denim will continue to be must-have items.

“The ones that can afford it don’t want to look frumpy. They’re not going back to moderates. All Boomers want to look younger,” she said. — With contributions from Lisa Lockwood, Whitney Beckett and Jeanine Poggi

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