A strategy. That’s what apparel firms need today to keep up with an increasingly competitive and unforgiving marketplace — even if all they want to do is get out of the business.
This story first appeared in the November 18, 2002 issue of WWD. Subscribe Today.
In examples ranging from small, privately held apparel firms to Sears, Roebuck & Co.’s acquisition of Lands’ End, the need for methodical planning and high performance standards emerged repeatedly in a financial panel discussion on “New Rules for Investing in Fashion” at the WWD/DNR Apparel CEO Summit 2002.
Participants were: Christine K. Augustine, associate director, equity research, at Bear Stearns & Co. Inc.; Philip Bleser, senior vice president, J.P. Morgan Chase & Co.; Arnold L. Cohen, chairman and co-founder of accounting firm Mahoney Cohen & Co. Inc., and Jeffrey A. Hornstein, managing director, Peter J. Solomon Co., an investment banking firm. The panel was moderated by Arnold J. Karr, WWD’s senior editor, financial.
Cohen suggested that many of his middle-market clients — those with annual volume of between $5 million and $200 million — have either failed to set a course for their firms or set one that sets the stage for failure.
“Their problems really start with planning. It starts with gross profit. You’d be surprised if I tell you that some of our clients actually plan on margins [that are] 20 percent higher than where they expect to come out with [because they’re] anticipating a huge amount of dilution. You know what kind of pressure that puts on these folks every day in planning what they’re going to be like going into tomorrow?”
Cohen shared with attendees a composite of his firm’s clients’ financial results, which revealed, among other statistics, that returns, discounts and allowances average 8 percent of sales and that this dilution figure is nearly twice that — 15 percent — for dress companies.
Bleser noted that multiples paid for public apparel, footwear and specialty retail firms, after a recent decline, are on the rise again, with a median of 7.24 times cash flow. While total dollars in the global M&A market have fell to 1996 levels, it is still a $1.1 trillion market, he reported.
“There are a lot of companies for sale and [ceos] are being really opportunistic, which we think accounts for why the multiples have gone up a bit. They’ll wait a little bit longer. They’ll find the right company and they’ll pay a little bit more for the right company.”
Hornstein noted that the acquisition of catalog merchant Lands’ End by Sears is a good example of a retailer buying a firm for growth. His firm represented Lands’ End in the transaction.
“Half of the U.S. consumers buy their appliances at Sears, but those customers who shop the ring of that store don’t buy apparel in the middle of the store. So the ‘softer side of Sears’ actually didn’t work and they needed a brand like Lands’ End to help them grow,” he explained.
Turning her focus to Bentonville, Ark., Augustine said Wal-Mart is not just the leader in the discount channel, but also a prime example of the shift away from the mall. Summing up investors’ attitudes, Augustine said, “Those companies that are servicing the off-the-mall customer are the ones that are commanding a higher premium because the consumer migration to off-the-mall will continue.
“There isn’t all that much mall development going on and that’s why we see the traditional department store struggling to find a format that they can use to grow off-the-mall. I don’t think it’s the death of the mall, but I do think as a real estate development area, it will continue to shrink,” she pointed out.
She observed that retailers focusing on the junior and young men’s markets are also starting to struggle under the weight of their own success. “There’s just too much square footage for the juniors’ space in retailing. The past six months show us that even the teen customers are not immune to a downturn.”