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NEW YORK — Consolidation fever — already red hot in wholesaling and among department stores — is spreading to the specialty store and direct marketing sectors. Thursday’s announcements that Chico’s is buying White House/Black Market, and Alloy is purchasing Delia’s may just be the first in a wave of takeovers.
Cash-rich Limited Brands, Schottenstein Stores Corp., which owns American Eagle Outfitters, and May Department Stores are among the retailers said to be on the prowl and companies ripe for the taking include Eddie Bauer, Wet Seal and Bebe, as well as J. Crew, J. Jill and Club Monaco, according to financial sources.
This story first appeared in the August 1, 2003 issue of WWD. Subscribe Today.
Limited, which long ago said its next acquisition would be outside the apparel sector, is believed to be interested in buying a personal care brand, something small that could be expanded and would complement the corporation’s proprietary beauty brands. “LVMH [Moet Hennessy Louis Vuitton] may be looking to get rid of one its brands,” said a source.
In addition, L.L. Bean is interested in Eddie Bauer, part of the bankrupt Spiegel Group that also could be sold. Eddie Bauer would require a huge image overhaul but market experts say there’s an opportunity for someone to cater to ageing yuppies and Baby Boomers who like active and outdoor apparel.
Meanwhile, American Eagle is said to be putting a team together to create a retail concept that would counter Abercrombie & Fitch’s latest strategy for a fourth retail division targeting an audience just older than its core A&F audience. A&F also operates abercrombie kids and Hollister for younger audiences, and has reportedly put Carol Kerner —whose background spans Donna Karan, J. Crew and Calvin Klein — into a key, full-time design position at the new division.
And, according to another source, “Talbots certainly has the money,” for an acquisition. “Years ago they did look at Brooks Brothers, but it was priced above what they viewed as fair value. So they would only buy something if it was priced right.” However, Talbots has been expanding through new stores carrying men’s wear, special sizes or accessories, in addition to its core misses division.
Reportedly, J. Crew, principally owned by Texas Pacific, and the publicly owned J. Jill have been up for sale from time to time. But J. Jill, at least, now seems to want to be independent and reportedly did once knock on Delia’s door. Meanwhile, J. Crew is undergoing a widely watched revamp being spearheaded by former Gap chief executive Millard Drexler.
Retail Brand Alliance, which purchased Brooks Brothers last year, has its hands full, considering its Carolee and Adrienne Vittadini acquisitions that preceded the Brooks Brothers buy. RBA also operates Casual Corner, August Max and Petite Sophisticates and is currently not believed to be in the market for additional brands.
Years ago, Liz Claiborne eyed Ann Taylor and Chico’s. Claiborne could get more serious about a new retail channel, especially with the field of desirable wholesale brands drying up. Analysts believe other suppliers, such as Jones Apparel Group, Tommy Hilfiger, VF Corp. and Kellwood could also be considering retailers after they run out of good wholesalers to buy.
For the past year, there’s been a rash of apparel firms put on the block and sold to other apparel firms: Claiborne bought Juicy Couture, Phillips-Van Heusen bought Calvin Klein Inc., Oxford Industries bought Tommy Bahama and VF is awaiting closure of its Nautica Enterprises deal. Kellwood, meanwhile, has put in a bid to acquire the bankrupt Kasper A.S.L., which owns the Anne Klein designer label. Hot on Kellwood’s heels is Jones, which itself is hoping to snap up Kasper because it needs to make up for lost volume from relinquishing the Lauren by Ralph Lauren licensing business.
In the retail arena in the past week, Lord & Taylor said it would close 32 stores, meaning there’s opportunity for expanding chains like Target to put up some sites, and Bon-Ton put in a bid for Elder-Beerman. Other regional retailers that have been struggling to survive, such as the Fresno, Calif.-based Gottschalk’s, could also be sold, while Federated Department Stores is putting its Macy’s nameplate on all its regional chains. With store-for-store increases harder to attain, consolidation and acquisition seem the route to take.
There’s also been speculation that J.C. Penney would sell off its Eckerd division to focus more on Penney stores, and Kmart continues to teeter.
“You’ll be seeing more firms consolidating operations as part of their efforts to find and improve sources of profitability,” said Walter Loeb, retail consultant. “One way to do that is acquire other firms. We’re seeing Bon-Ton making a bid for Elder Beerman, and of course there’s May Department Stores shedding some of its Lord & Taylor sites. We are definitely in a consolidation phase.”
“With public retailers trading at very low valuations, and with very low inflation and many retailers showing negative comps, there are opportunities right now for cash-rich retailers to make strategic acquisitions of other retailers,” said Robert Pressman, executive managing director, retail consulting group, Cushman & Wakefield.
“Many businesses that are successful are becoming mature, organic growth is hard to come by, and the only way to grow is to acquire. This situation is going to continue for a long time,” predicted Arnold Aronson, managing director of retail strategies for Kurt Salmon Associates.
One investment banker who advises apparel firms and retailers on mergers and acquisitions observed, “The economy feels right for these deals. You’ll see more of them. The economic news suggests that a recovery is in the works and for those who are feeling confident about the future, this may be the right time for a deal. The cost of borrowing money is still very low based on current interest rates.”
On Thursday, Chico’s said it inked a $90 million agreement to buy The White House, which targets a demographic between 12 to 15 years younger than the Chico’s customer. The Chico’s deal combines $85.6 million in cash and $4.4 million in Chico’s common stock, or about 176,000 shares.
“We’ve looked at a lot of deals in the last few years, and built up a lot of cash, but White House/Black Market was the first company we saw that was not broken,” said Charles Klemen, Chico’s chief financial officer. He added Chico’s is not searching for another chain to buy currently. It’s planning to launch an intimate apparel chain next year for customers with similar demographics to those who shop Chico’s.
Chico’s move into The White House was well received by Wall Street. Shares of Chico’s gained $1.58, or 6.18 percent, to close Thursday at $27.15 in trading on the New York Stock Exchange.
“This acquisition is a strong fit both from a strategic and financial standpoint,” said Harry Ikenson, managing director, First Albany Corp. “We believe it will leverage the White House/Black Market’s unique merchandise offering across Chico’s existing infrastructure and provide a significant growth opportunity for Chico’s.”
While buying another retailer is a new strategy for Chico’s, it’s logical, said Ikenson, explaining that Chico’s was gearing up for it for years, having built an infrastructure of management, distribution and systems, as well as cash, readying the company for an acquisition. Ikenson also said that the ceo’s already were friendly, shared real estate information, and liked to be neighbors since they attract similar demographics, and that Chico’s marketing strengths, particularly with its Passport program offering discounts based on purchases, could be applied to White House/Black Market, which has achieved sales exceeding $500 a foot without any significant marketing. “We think marketing will be a huge opportunity,” Ikenson noted.
Jeffrey Klinefelter, analyst at U.S. Bancorp Piper Jaffray, wrote in his research note, “We are upgrading our rating to Outperform from Market Perform….Overall we believe upside exists to our estimates and to the stock as The White House acquisition adds to what is already a solid core Chico’s story — at least three years of 25 percent annual square footage growth and additional growth prospects from its pending intimates product extension, which will be tested as an in-store section as well as a stand-alone concept.”
He noted that about half of The White House’s 103 stores are under four years old, sufficiently updated in design. He stressed that Chico’s prowess in marketing, direct mail and catalogs will influence The White House, where he expects to see a customer loyalty program developed.
“We see long-term potential for Chico’s to expand the highly productive White House/Black Market concept,” said Lauren Cooks Levitan, analyst at S.G. Cowen, in her note. Levitan noted that The White House has high sales productivity that reached over $745 per selling square foot during fiscal 2002, as well as an “extremely loyal customer base.”
The purchase becomes Chico’s primary growth vehicle now, therefore enabling Chico’s to spend more time fixing the fledgling Pazo retail concept, which has not met expectations.
On Thursday, Alloy Inc. said it was purchasing the financially troubled junior chain Delia’s in a deal valued at $50 million, but Wall Street was less gung-ho on that deal. Alloy shares rose just 17 cents, or 2.5 percent, to close Thursday at $7.02 in Nasdaq trading.
Matthew Diamond, chairman and ceo of Alloy, said in a conference call, “We believe that the addition of Delia’s puts Alloy in a position to pursue significant value-created strategic transactions involving our merchandise business. We plan to be proactive in pursuing opportunities including the receipt of a strategic investment, a merger, a sale or a full or partial leveraged spinoff.”
Levitan of SG Cowen wrote in a research note, “While Alloy is acquiring a decent brand and customer database, we believe they are spending $50 million for a struggling retailer essentially to bulk up their retail operations only to eventually shed the entire retail portion of their business and resume focus on their media business — a strategy which we can’t totally endorse at this point.”
Levitan wrote that, with Alloy’s recent convertible debt offering, which raised $62 million, she wasn’t entirely surprised by the company’s cash acquisition announcement, but was surprised over Alloy’s acquisition target and its implications for Alloy’s longer-term business strategy. “We understand the desire to focus on the media business but are not convinced this is the optimal manner in which to achieve simplification of the business model,” she added.
Levitan did say that Delia’s continues to resonate well with teenage girls, and with Alloy would have about a $300 million base in teen catalog retailing. But one big question was that Delia’s retail sites might be “sub-optimal store leases.” She added, “Admittedly, Alloy has gained the scale required to be a stand-alone retail business or attract the attention of a potential acquirer. However, we fear the store-based retail opportunity may be overstated and suspect potential acquirers may be concerned about the status of the existing Delia’s leases.”