The Nordstroms might be trendsetters, but going private with the help of private equity might not be a miracle salve for all the department stores getting beaten up in a particularly mean retail market.
As Leonard Green & Partners heads to the financing market to try to help the family take Nordstrom Inc. private, according to sources, rumors and innuendo have sprung up throughout the department store world.
Among the latest moves being speculated are:
• Richard Baker is said to be keen to take his Hudson’s Bay Co. private again, although it is seen as a tough job to add more debt to company’s balance sheet and he’s also fending off an activist investor. (Asked about the potential for a buyout, a Hudson’s Bay Co. spokesman said, “We do not comment on rumors or speculation.”)
• Dillard’s Inc. shares jumped up as much as 4.9 percent, to $58.19, on Friday on reports of vague rumors that the Dillard family might be considering a similar move. Investors held on to some of those buyout hopes and the stock closed up 0.1 percent at $56.88 on Wednesday. (A spokeswoman declined to comment on the topic.)
Those that aren’t said to be at least weighing their options have been busy fending off outsiders with their own ideas or are just struggling to get back on the growth track.
• Macy’s Inc. was seen as a takeout target, of Baker’s, and was being needled by an activist investor, Jeffrey Smith’s Starboard Value, but both have moved on, leaving Macy’s to its own future, for now.
• The Bon-Ton Stores Inc. and J.C. Penney Co. Inc. are both cash-strapped and seen as likely too indebted for a traditional buyout, although distressed transactions of one kind or another are always possible.
• And in the “already gone” category are Belk, which was bought by Sycamore Partners, and Neiman Marcus, which was taken private, first by TPG and Warburg Pincus and then sold to Ares and Canada Pension Plan Investment Board, which have struggled with the now heavily indebted retailer.
Oftentimes when a company is taken private there are plans for changes that can be made away from the glare of Wall Street and/or the sense that the price tag is cheap and there’s some opportunity to take the company public again down the line.
Those rationales might work for Nordstrom’s, which has a relatively light debt load and has proven to be among the first to experiment with new ideas. But the equation could well be different for many of the other contenders.
Allen Questrom — who has served as chief executive officer of J.C. Penney, Macy’s forerunner Federated, Barneys New York and Neiman Marcus — said every company faces its own circumstances, but that the pressure might not be any less with private equity backers instead of Wall Street analysts.
Questrom said it was hard to see how Baker could put more debt onto Hudson’s Bay’s books to take it private and wondered what the Nordstroms would get from taking the firm private given that they already control 31 percent of the stock.
Additionally, he noted that being private might not necessarily make life all that much easier.
“Analysts always have their point of view,” Questrom said. “But if your business is good, or reasonably good even in a difficult time — when I had Penney’s, it was a difficult time, but we had a strategy that was going to take four or five years, I had very little pressure from the market. There’s going to be a lot of pressure if you have private equity people, they want a return back in five to seven years.”
He added that putting complete ownership into the hands of a family could also cause pressures with many interested parties all pushing for their own returns.
If pressure from owners — whoever they are — remains a constant, department stores both public and private are still trying to find their way through a period of unprecedented change.
“We have been dealing with the Baby Boomers for so long, the Baby Boomer is now the past,” Questrom said. “That doesn’t mean they won’t buy some, but they have fewer needs, their closets are full.”
He noted that Boomers coming out of the post-war era were striving and gravitated to brands such as Ralph Lauren, which projected an aspirational lifestyle.
“Millennials have different needs altogether,” the former ceo said. “They’re less interested in brands, at least the brands that we grew up with. They’re less interested in the aspiration that many of the Baby Boomers grew up on, so there’s a whole different thing going on.”
That — along with the rise of Amazon as a competitive force, lower margins on e-commerce, less traffic in malls and the rest of the changing landscape — has department stores itching for some forward momentum.
“For the longest time, their playbook has been routine and now they’ve decided they need to try adventure because it’s a lot less dangerous,” said Michael Dart, partner in A.T. Kearney’s private equity practice and author of the forthcoming book, “Retail’s Seismic Shift” (St. Martin’s Press). “Every ceo I speak with is really saying, ‘We need to be adventurous, we need to take risks and we need to do something very differently.’ That to me is one of the biggest drivers.”
So department stores are on the move, but where are they going?
“There is really no coherent vision or understanding on what the endgame is, what the new steady state is for a lot of these businesses,” Dart said. “We are still in the midst — and it could still be in the early innings — of a major retail shakeout. And when you’re in that retail shakeout, there are advantages to being private, that helps you manage a business for cash.”
And when times are tough, cash is still king.