In the last eight months, about $1.9 billion has been spent on acquisitions as vendors and retailers consolidate —and That could just be the beginning.
First it was Phillips-Van Heusen, then came Liz Claiborne and Oxford Industries. Last month it was VF Corp., and now Jones Apparel has made an acquisition move.
What all these apparel behemoths have in common is the incessant urge to scoop up smaller firms into their arms. And while larger wholesalers have been doing it for a while, now retailers, looking to sustain top-line growth in a weaker economy, are getting in on the action. Within the last month, specialty retailer Chico’s F.A.S. said that it was using a portion of its cash buildup to acquire The White House, and cash-strapped Delia’s agreed to be acquired by Alloy.
The total spent on acquisitions so far by these major vendors is more than $1.7 billion. Add the $140 million combined from the two retail deals announced last month and the industry total for the first eight months of 2003 shoots up to $1.9 billion.
The trend is far from new but, given current market conditions, might make more sense than ever for some companies. Snapping up opportunistic values that can enhance market share is the easiest way to grow a business. Some firms are able to latch onto a magic formula that enables them to build a brand from the ground up, such as Abercrombie & Fitch and its Hollister offshoot, or Pacific Sunwear and its Demo concept. A&F is hoping to score again, this time with a retail division targeting an audience just older than its core A&F audience.
However, successful ventures like these are few and far between.For most firms, the risks entailed in building a new brand far outweigh the likelihood of success.
And for companies that “buy right,” there are other benefits, like securing a level of earnings growth that ensures them a place on Wall Street’s radar screen or even something more practical such as enhancing their negotiating power with existing retail partners.
Not to mention the need to keep growing in a tough economy.Peter Solomon, chairman of investment banking firm Peter J. Solomon Co., observes, “One, in slow-growing economies, acquisitions become more important, not less. Unless you buy, you can’t grow. Two, you have to use your balance sheet to grow. Cash flow can fund your internal growth but you have to go to your balance sheet for that strategic acquisition. One of the things we proselytize about here is that there are almost no companies that can grow 100 percent internally. Eventually, your geographic area or your retail channel or something else will constrain your ability to grow, as Kohl’s is just starting to see now. Retailers don’t get it, but I think many are starting to understand it better.”
David Lamer, a former analyst and now a principal at Joshuatown Advisors, a retail and apparel advisory firm, expects to see more consolidation among apparel firms, and also believes that retailers will soon start making more deals of their own.
“There is a lot of room for consolidation because the economic climate is still very tough out there. From what I hear, business conditions are still not very good for our industry. Of course, you’ll still see many more manufacturers consolidate than retailers, but that is more of a function of there being so many more vendors than retailers,” he says.
Gilbert Harrison, chairman of the investment banking firm Financo Inc., says, “I expect to see continued consolidation for a long time to come. It is a gradual progression that has gone on for the last 15 years. It is no different right now from what we were seeing before, except that now a lot of big deals and names are involved. When business is soft, firms often look to acquire others to grab the synergies that can be had when operations are combined.”
Many financial advisers note that they’re starting to see what appears to be increased activity on the merger front, mostly from venture capital firms flush with cash and hedge funds that waited on the sidelines with hoards of cash while they figured out where best to invest.
According to the July 25 issue of The Kiplinger Letter, a forecasting publication for executives, “There’s more than a whiff of optimism about the economy. Sensing greener pastures in the future, firms are looking to expand now, while targets and financing are fairly cheap.”The Letter says that the pickup so far is still “modest,” up to 7,500 mergers and acquisitions this year from last year’s 7,000 deals, even though the economy lately seems to have remained stagnant. In the late 1990s, over 10,000 deals were done a year.
One difference now in the dealmaking process, the Letter notes, is that acquirers are “treading with more care than in the go-go days of the past, making sure that the deals are in shareholders’ interests, fit the company’s long-term strategic goals and aren’t too pricey.”
Also fueling merger fever is Wall Street, where earnings and sales growth remain crucial.
Jennifer Black, an analyst at Wells Fargo Securities Inc., explains, “Of course, earnings growth is a very high priority. It has to be. The whole focus of Wall Street is that investors want to own a company that is going to continue to grow. That is what the market pays for. Investors pay for future growth when they buy stock in a company. Companies, on the other hand, have to manage expectations and manage earnings, and one way to do that is to buy other firms.”
While companies like Phillips-Van Heusen and Oxford Industries have substantially elevated their profiles with acquisitions of privately held firms — Calvin Klein, Inc., and Tommy Bahama, respectively — the biggest acquirer of all so far seems to be Liz Claiborne, which in March acquired Juicy Couture, the hot contemporary brand known for making velour tracksuits chic for everyone from soccer moms to celebrities.
The acquisition, reportedly at a purchase price of between $38 million and $40 million, marked the 31st brand addition to the Liz family. For Liz, however, its aggressive acquisition strategy in the last few years has proven very successful. Its now-varied distribution channels have helped the fashion firm survive the ups and downs of an industry that relies heavily on fashion-fickle consumers. What the Liz Claiborne brand couldn’t do, its more recent additions can.
Similarly, when VF Corp. last month said it would pay $585.6 million in cash for Nautica Enterprises, many on Wall Street applauded the deal. For VF, a $5.7 billion company that lost out in its attempt to buy Calvin Klein in December, a Nautica acquisition gives VF’s portfolio two upscale denim brands, Nautica Jeans and Earl Jean. The additions also boost VF’s presence in the department and specialty store channels. Nautica in turn is expected to benefit from VF’s supply chain capabilities, sourcing and inventory and brand management.In the latest consolidation move, Jones Apparel Group snapped up Kasper A.S.L. during a bankruptcy court auction, outbidding Kellwood Co. by sealing the deal with the highest cash bid at $204 million, plus the assumption of $12.6 million in prepaid royalties, bringing the total purchase price to $216.6 million.
Expected to close in November, the combination gives Jones additional market clout in the moderate suit business through the Kasper brand, as well as a foray into the high-end designer market through the Anne Klein label. The acquisition also gives Jones the Albert Nipon and Le Suit brands.
And while the mega names may be dominating the consolidation boom this year, there also have been deals involving considerably less money.
In January, Silas Chou and Lawrence Stroll — who already own the British luxury brands Asprey & Garrard — added another one to their holdings, snaring a controlling stake in Michael Kors LLC from three of its minority partners in separate deals valued at slightly less than $100 million. One of those deals involved the one-third ownership in the Kors’ business that was held by LVMH Moët Hennessy Louis Vuitton.
LVMH, for its part, has been shedding noncore businesses, such as beauty firms Hard Candy and Urban Decay, which went for the relatively small sum of $1 million.
Not to be outdone, even licenses can be bought and sold. In May, LVMH sold the Michael Kors fragrance license to Estée Lauder Cos. for an estimated $20 million.
And while the economy might be showing some faint signs of an upturn, so far the buying frenzy isn’t showing any signs of abating.
The immediate focus of David Dyer, the former ceo of Lands’ End and new chief of Tommy Hilfiger Corp., “will be understanding the landscape of the Tommy Hilfiger business and simultaneously looking at new opportunites for the company,” Joel Horowitz, chairman, said during a recent conference call with Wall Street analysts when the company posted first-quarter results. The firm disclosed in May that it hired J.P. Morgan Chase to assist it in “exploring acquisitions of additional brands.”
Meanwhile, the highly acquisitive Hal Upbin, Kellwood’s chairman, president and ceo, isn’t losing any sleep over the loss of Kasper to Jones. In an interview following the Kasper bankruptcy court auction, he said, “You win some and you lose some. This doesn’t change our strategy. We are always reviewing opportunities [and] we’re staying the course with our strategy. We are looking at different brands in the better category.”And there could be others.
According to Joshuatown’s Lamer, one should keep an eye on interest rates.
“With interest rates looking like they will rise, you’ll probably see smaller companies looking for partners. One reason is that many are so leveraged that the higher interest rates have put them in a position where they might not be able to service that debt much longer. What they’ll be looking for is a merger partner that can provide gains in synergies,” he explains.
Walter Loeb, a retail consultant at the firm that bears his name, observes, “Keep an eye on the economy and where inflation is. If interest rates rise, that could be key. It is usually at that inflection point that more consolidations and merger deals are made.”
With all that has been bought and sold so far, however, there’s now a question of whether there’s anything left to buy.
Financo’s Harrison believes that there are enough opportunities to keep everyone busy and on the prowl for just the right deal. “You have to remember that there are a lot of firms doing an annual volume of $200 million to $300 million. These are capable companies that can be either good acquisition opportunities or candidates to buy other smaller firms.”
Wells Fargo’s Black notes, “The larger firms won’t buy the real small firms that do under a certain annual volume because they need the acquisition to be large enough so that it could be meaningful and add some value to earnings.”
She, too, expects consolidation in the industry to continue as the demands of competing for retail floor space intensify.
Black explains, “The number-one point always is to grow. Very few companies, except small firms, can generate organic growth. If you are selling into the department stores and depending on what channel of that distribution you are in, small companies usually cannot meet the standards and demands on technology that are generally required for the channel they want to sell in. If they want to be a player in that arena, those small firms must have the significant dollars behind them. And if they’re large firms that want to grow, they have to diversify so they don’t leave themselves wide open in any one segment.”Bryan Lawrence, an investment banker at Lazard Freres, observes that consolidation is likely to occur for another reason: “It is going to be increasingly tempting for smaller companies to go private because these days debt is cheaper and equity is more troublesome.”
The banker explains that with rates as low as they are, financing the debt is still relatively cheap. In contrast, the public firms are finding that new rules such as Sarbanes-Oxley are making it harder for the executives who are also company directors. Some, he observes, are confused about what the rules require of them, and there are still many gray areas that remain untested.
The Sarbanes-Oxley Act of 2002 was enacted in the aftermath of the accounting scandals of Enron Corp. and WorldCom, which resulted in both firms filing for bankruptcy court protection in two of the largest corporate failures in U.S. history. It represents the single most comprehensive law affecting corporate governance, financial disclosure and public accounting procedures since the early 1930s.
To be sure, if vendor consolidation slows for whatever reason, there are still plenty of chances for retailers to combine.
So far, retailers seem to be on the fringes of the consolidation pattern that has hit wholesalers. That could change soon.
Dana Telsey, retail analyst at Bear Stearns, observes, “A lot of retailers are at what we consider a mature level. We have a belief that there are 400 good malls and 800 good strip centers. Once a retailer gets past that, the level of growth is not as high.”
According to Telsey, retailers’ same-store sales often decelerate after they’ve hit 400 malls. That’s because the transactions at the cash register begin to top out once that 400-mall mark is reached.
So where do retailers go for growth?
Retailers with cash on their balance sheet are looking at other buying opportunities, such as Chico’s purchase of The White House, Telsey notes. “What happens with the specialty concepts is that they look for synergies from economies of scale, such as synergies of organization, advertising, buying and real estate,” she observes.
But are there even enough retail opportunities out there?According to Telsey, “Yes, we see a lot of private companies in small areas that are limited by capital restraints to grow larger.” She points to regional players that have made news as an example: Bon-Ton’s bid to buy Elder Beerman.
Cash-rich firms such as Limited Brands, Schottenstein Stores Corp. and May Department Stores are among the retailers said to be on the prowl. And the names that have surfaced as potential candidates for acquisition from time to time are the Eddie Bauer division of bankrupt Spiegel Group, J. Crew and J. Jill.
L.L. Bean so far is taking a “keen interest” in Eddie Bauer and, according to a spokesman, is in the midst of conducting preliminary due diligence. A Bean acquisition of Bauer’s 469-unit chain would allow it to grab a chunk of store space and convert some of the Bauer units into Bean stores. Such a move would allow Bean, which is mostly a catalog firm with a Web presence and some outlet stores, to immediately compete more effectively with rival Lands’ End, which itself was acquired by Sears, Roebuck & Co. in a $1.8 billion deal last year.
And despite the generally hopeful outlook for the economy overall, any hoped-for turnaround in the U.S. retail industry remains elusive. If the trend continues, there could be more potential candidates forced to review their options.
According to an Aug. 7 report by Fitch Ratings: “The retail industry continues to struggle as the U.S. economy attempts to pick up steam while consumers remain cautious. The economy appears to be in the early stages of a recovery, although unemployment continues to inch higher. Moreover, job losses have been greatest among higher-paying manufacturing and white collar positions, keeping a lid on disposable income and consumer confidence levels.”
The report points out that sales have been weak for most retailers in the first half of fiscal 2003, “reflecting the soft economy, merchandise deflation and limited new product offerings to spur shoppers’ interest….The discounters, warehouse clubs and off-price retailers led the industry with low-single-digit increases during the half, while the department stores lagged, posting low- to mid-single digit declines.”
Fitch concludes that the outlook is for continued weakness over the balance of the year, with a turnaround dependent upon faster job creation.Deborah Weinswig, retail analyst at Salomon Smith Barney, believes that consolidation can be nothing but beneficial for both the apparel and retail sectors.
“The consolidation on the retail side is probably a positive, if they can find the right fit. As for consolidation on the apparel side, it can be a positive for the department stores as well. It would be far easier for them to go to one resource to get what they need, rather than having to go to 10 companies. Department stores can buy in volume from one vendor, and that might be a more efficient win-win for everybody,” she observes.
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