Sequential Brands Group and Authentic Brands Group are the front-runners to buy the Nautica brand, according to sources.
VF Corp. last week said it planned to sell the brand as part of a five-year strategic reorganization plan revealed last year that is intended to make the corporation a more consumer- and retail-centric organization.
Karen Murray, the longtime president of Nautica, exited that brand a year ago and is currently the chief executive officer of Sequential. If Sequential is successful in acquiring the label, it would most likely be housed within the Differential Brands Group, a sister company to Sequential that is owned by the same private equity firm and operates Hudson Jeans, Robert Graham and Swims.
Reached on Wednesday, Murray declined to comment on the speculation.
Sequential owns, manages and licenses a large number of brands including Joe’s Jeans, Ellen Tracy, Martha Stewart, Jessica Simpson, William Rast and Caribbean Joe.
“It would make perfect sense for Sequential to get it,” said one source close to the negotiations. “Karen has the relationships with the retailers, employees and licensees, and she loves the brand.”
Murray spent a decade at the helm of Nautica, which has global sales of around $1.2 billion, with just under half coming from U.S. sportswear sales. Its primary distribution in the U.S. is at Macy’s although Dillard’s and Belk also carry the brand. It also operates 385 stores worldwide, according to the VF web site, and has some 50 licensees in 75 countries. In the U.S., there are only outlet stores and the one full-price store the brand operated on Prince Street in SoHo has since closed. Women’s wear is also a major part of the business overseas, where the brand is seen as upscale and aspirational.
Even so, it doesn’t fit well into the VF portfolio.
In reporting its fourth-quarter results Friday, Steve Rendle, chairman, president and ceo of VF, said, “While we do not yet have a definitive agreement, we are actively engaged with several parties” and the corporation is “well into the process.”
VF decided to sell Nautica, Rendel added, because the company “just came to a point where it didn’t necessarily hit all of our strategic touch points financially. It was not in line with driving our financial aspirations, and we came to a point where we thought perhaps it would be a better owner that could unlock the value that this brand holds.”
VF recently acquired Williamson-Dickie and Icebreaker, which better complement the company’s workwear and outdoors labels, which include Wrangler, The North Face and Timberland. Nautica, whose roots are in the sailing arena, had transitioned to more of a sportswear label over the years.
Nautica was founded by David Chu in 1983 and bought by VF Corp. in 2003. It has experienced its share of challenges and tried a number of different strategies over the past several years as it tried to navigate through the U.S. retail environment and the increasing competition from new and established brands offering a similar aesthetic. Heavily penetrated in the department store channel in the U.S., Nautica has also been plagued by those stores’ dependence on promotions to drive sales.
One potential stumbling block to a deal with Sequential, however, is the company’s debt.
According to a Morningstar report, Sequential has long-term debt of about $598.4 million, and total equity of $443.7 million. That gives the company a debt-to-equity ratio of 1.3, compared to a five-year average of 0.9 and a sector average of 0.2. A high ratio means a company could be using too much debt to run the business, while a ratio that is low could mean a company is relying on equity to finance its business.
In the case of Sequential, there is concern that it has piled on too much debt to finance the number of acquisitions it has made over the past few years. The risk is that if business takes a turn for the worse, the company won’t be able to pay its lenders. But the question mark here is the uncertainty over just exactly what would be the ideal debt-to-equity ratio for brand management firms, whose business model is based on the regular acquisition of the intellectual property of brands.
In Sequential’s favor, though, is its relationship with the private equity firm Tengram Capital Partners, which has investments in both Sequential and Differential.
William Sweedler, cofounder and managing partner of Tengram, and chairman of both Sequential and Differential, was on an airplane and unavailable to comment. However, he responded via e-mail: “We don’t comment on deals we may, or may not be working on.”
In contrast, not much is known about the financials of Authentic Brands Group, a privately owned brand management firm. However, ABG in October received a “strategic investment” from private equity firm General Atlantic, which joins existing investors Leonard Green & Partners and Lion Capital. The investment enables ABG to focus on investments in brands that have annual retail sales in the $500 million to $1 billion range.
And in the case of Nautica, ABG already has a structure in place to handle the brand’s retail stores. All it has to do is find a way to duplicate the components of its Aéropostale transaction in 2016, which had ABG take ownership of the Aéropostale’s intellectual property assets and work in partnership with Simon Property Group and General Growth Properties to have the real estate investment trusts operate the stores. It’s a structure that would enable the mall operators to control the store sites and keep them in operation.
Jamie Salter, chairman and ceo of ABG, said he had no comment on Nautica.
A third interested party believed to be Marquee Brands, owner of Ben Sherman, Body Glove and BCGG, was also on the hunt but has since abandoned efforts to acquire Nautica, sources said.