Riddle: What does Brooks Brothers have in common with Barneys New York and Forever 21?
Answer: As it moves further away from a potential sale and closer to a bankruptcy filing, the retailer is attracting potential interest from the same type of brand management companies that bought the other two firms out of Chapter 11.
The prevailing wisdom, according to sources, is that Brooks Brothers will file for bankruptcy sometime next month. This would allow it to cut its debt, which is believed to be around $300 million, and shutter a large number of its 250 or so retail stores in the U.S.
“There’s a fierce battle going on,” said one source close to the negotiations who requested anonymity. “It’s a really active auction right now.”
The leading contender to buy the business is Authentic Brands Group headed by Jamie Salter. But the aggressive licensing company has some major competition from Marquee Brands, WHP Global and even Sequential Brands. It is expected Brooks Brothers’ owner Claudio Del Vecchio would negotiate with one of these companies to be the stalking horse bidder in advance of a Chapter 11 filing.
“The Brooks Brothers brand is amazing,” a source close to the matter said. “It has more than 200 years of iconic heritage. Sure, it has to be shifted and adapted to modern times, but it’s an A-plus brand.”
If ABG beats out the other interested parties to snap up Brooks Brothers, it is expected to mimic the strategy it used to purchase Forever 21 by teaming up with its mall developer partners Simon Property Group and Brookfield Property Partners. Under the terms of that deal, ABG and Simon each own 37.5 percent of the intellectual property and operating business and Brookfield owns 25 percent.
“It would be the same playbook as Forever 21,” said a source.
In February, ABG acquired the teen retailer out of bankruptcy court for $81.1 million. The 448 stores were kept open, the company hired a new chief executive officer, former H&M executive Daniel Kulle, and last week signed a licensing deal in Mexico to significantly expand the retailer’s reach in that country. Other deals are expected shortly in Latin America and Brazil and ABG is also eyeballing South America, Western and Eastern Europe, China, Southeast Asia, the Middle East and India, the company said at the time of the purchase.
Brookfield has also earmarked $5 billion to acquire non-controlling stakes in retail businesses struggling to meet their capital needs during the pandemic, so having the cash to buy Brooks Brothers is not an issue.
When asked about his interest in Brooks Brothers, Salter would say only that he is “very acquisitive” and “looking at a lot of things in the marketplace.”
ABG has become a major dealmaker in the fashion and media marketplace. Last summer BlackRock, through its Long Term Private Capital arm, invested $875 million into the brand management company to allow it to expand more aggressively globally and digitally. Other partners in ABG include Leonard Green & Partners, General Atlantic, Lion Capital and the two mall developers.
Soon after completing the BlackRock deal, ABG purchased Barneys for $271 million, but in that case, it’s employing a different strategy. Barneys’ retail locations were closed and a deal was struck with Saks Fifth Avenue to open Barneys shops within its stores. The onset of the coronavirus delayed any moves along those lines at Saks, however.
ABG also bought Sports Illustrated last April for $110 million and is moving forward with expanding the brand into apparel as well as entertainment including documentaries, television shows and movies.
But a deal for Brooks Brothers, which celebrated its 200th anniversary in 2018, is not a slam dunk for ABG. Marquee Brands, which owns BCBG, Ben Sherman, Bruno Magli and Body Glove, is also interested in adding the business to its stable. Last April, Marquee purchased the Martha Stewart and Emeril Lagasse brands from Sequential Brands for an estimated $175 million. It also took back its license for BCBG Max Azria and BCBGGeneration from Centric Brands last month when that company filed for Chapter 11. The annual licensing revenue from that deal was believed to be around $14 million, according to sources.
Cory Baker, chief operating officer of Marquee, said Monday he could not comment “on any pending opportunities before us.”
WHP Global may be the newest entry to the brand management business, but it, too, has a large war chest to purchase brands. Oaktree Capital Management LP recently increased its investment in the firm to $350 million, bringing the total funds available for dealmaking to over $1 billion. WHP, which is headed by Yehuda Shmidman, was formed last July and so far has purchased the Anne Klein and Joseph Abboud trademarks.
Although Shmidman had no comment on his potential interest in Brooks Brothers, he has said in the past that WHP was established to acquire large-scale and well-known consumer brands with sales volume in excess of $500 million that have strong growth potential in international and digital markets. Brooks Brothers would fit that bill.
Sequential is also said to be interested in Brooks Brothers, although it is on shakier financial footing than the other three companies. Last month, the owner of the Jessica Simpson, Caribbean Joe and Ellen Tracy brands, reported a loss from continuing operations in the first quarter ended March 31 of $85.3 million. However, Sequential has said that it continues to explore either divestitures of its existing brands or potential acquisitions “to best position the company for long-term success.”
Sequential’s management declined to comment.
Erin Brady, a partner with the law firm of Los Angeles-based Hogan Lovells, who specializes in corporate restructurings and liquidations, said Simon and Brookfield’s interest in keeping Brooks Brothers operating as a going concern makes perfect sense. As more and more retail chains fail and close stores, it decimates those developers’ malls. “And you don’t want a mall full of liquidation sales,” she said.
Although she is not involved with the Brooks Brothers deal, Brady said the most likely scenario would be for the company to file bankruptcy with a stalking horse bid from a consortium such as ABG/Simon/Brookfield, which would buy the intellectual property, and debtor-in-possession financing in place from a liquidator such as Gordon Brothers, which recently provided Brooks with a $20 million secured term loan. If no other bidders emerge after an auction in bankruptcy court, the consortium would be successful in purchasing the company.
But what would Brooks Brothers look like if it was owned by a licensing company? The consensus is that it would need to be given a dramatic facelift. Although only 20 percent of Brooks Brothers’ sales are tailored clothing, the company is still seen as heavily dependent on dress apparel.
“It needs to be refreshed and it has to be cool,” said one observer. “You need to get a 30-year-old with a beard, wearing jeans and Air Jordans in the store and sell him sportswear and maybe a suit.”
Del Vecchio has significantly increased the quality of the merchandise since purchasing the company from Marks & Spencer for $225 million in 2001 and further increasing its sportswear offering. Its Red Fleece collection is targeted to a younger audience and centers around preppy-inspired sportswear, and the company attracted a following of young people with its popular Thom Browne-designed Black Fleece collection. However, that line was discontinued in 2015 after eight years.
Despite the changes, the company’s sales have been holding steady at around $1 billion for the past several years, despite expansion in international markets. The brick-and-mortar stores are said to bring in $750 million and the e-commerce site another $250 million.
Del Vecchio pulled out all the stops to celebrate the company’s 200th anniversary two years ago with an elaborate runway show in Florence, Italy, during Pitti Uomo, followed by a star-studded gala in New York and a traveling exhibition of its storied history. But shortly after, Del Vecchio’s appetite to continue to own and operate the company appeared to wane. Sales rumors started to swirl and last year, the 63-year-old businessman hired investment firm PJ Solomon to explore and analyze strategic options. “It was a passion project for him, but he’s ready to move on,” a source said.
However, the sale process did not go as Del Vecchio had hoped — offers of $400 million were rejected, sources said — and he now believes bankruptcy is the company’s most viable option. The company has already put in motion plans to close its three factories in the U.S., in Garland, N.C., Long Island City, N.J., and Haverhill, Mass., this summer.
And sources believe that up to half of the company’s stores are unprofitable and need to be closed, which is only practical to do while in bankruptcy.
“Basically, you keep four or five of the big flagships and get rid of everything else,” said one competing retailer. “Then you run it as an Internet play. That’s the only way the business can survive.”
One potential monkey wrench is that Del Vecchio, through a holding company, personally owns the building on Madison Avenue that houses the company’s flagship. “You have to have that building,” a source said. “It’s a critical part of any go-forward strategy.”
Another source doesn’t agree. Although Brooks Brothers has been located at 346 Madison Avenue for more than a century, the flagship is quite large: The building measures 11 stories and is more than 122,000 square feet. Four floors, or around 50,000 square feet, are selling space; the remainder are showrooms and offices. “He can either lease it to the new owner or close it,” said one source. “There are plenty of other great locations available on Madison Avenue.”
Whatever happens on 44th Street and Madison Avenue, Brooks Brothers will undoubtedly be a different business if it is sold to ABG, Marquee, WHP or Sequential.
Although WHP is definitely interested in Brooks Brothers, the company has its hands full with the Joseph Abboud brand and could see its fortunes significantly impacted if Tailored Brands files Chapter 11. Tailored Brands, owner of the Men’s Wearhouse and Jos. A. Bank men’s stores in the U.S. and the Moores chain in Canada, is teetering on the edge of bankruptcy.
Last week, Tailored Brands released early first-quarter results and said: “If the effects of the COVID-19 pandemic are protracted and we are unable to increase liquidity and/or effectively address our debt position, we may be forced to scale back or terminate operations and/or seek protection under applicable bankruptcy laws.”
Over 600 of its stores have reopened but as of June 5, comparable-store sales performance for stores open at least one week was down 65 percent at Men’s Wearhouse, 78 percent at Jos. A. Bank and 40 percent at K&G, the company said.
In the first quarter, total sales plummeted 60.4 percent to $286.7 million, and e-commerce sales were down 31.9 percent versus the first quarter of last year, the company said. It did not provide figures on operating profits or losses for the period. But even before the pandemic caused the company to close all its stores, it was struggling. In March, it reported an operating loss of $35 million in the fourth quarter, compared to operating income of $13.3 million last year. On an adjusted basis, the loss was $12.3 million, compared to an operating loss of $4.3 million last year. Comparable-store sales fell 3 percent while net sales dropped 5.3 percent to $691 million.
As a way to reduce debt, Tailored Brands made a deal to sell its Joseph Abboud trademark to WHP in January for $115 million. Under the terms of the deal, which closed in early March, WHP licensed Tailored Brands to be the exclusive retailer to sell and rent Abboud branded apparel in the U.S. and Canada. The Abboud brand accounted for more than $500 million in sales for Tailored Brands, but if the company were to close or file bankruptcy and shutter a large number of stores, that number would plummet.
After buying the Abboud brand, Shmidman said that he plans to take the brand to other parts of Asia — it has a longstanding deal with Onward Kashiyama in Japan — the Middle East, Europe and Latin America. But losing a large chunk of the royalties from its largest market could still be a blow.
Sources familiar with the situation said Tailored Brands has no other choice than to file Chapter 11.
“It’s not even a question,” said one source. He pointed to the fact that the company, which is saddled with over $1 billion in debt after its 2014 acquisition of Jos. A. Bank for $1.8 billion, is being advised by Kirkland & Ellis, which often recommends that route.
But another source isn’t convinced a bankruptcy filing is inevitable. “They’ve reopened over 40 percent of their fleet, ahead of schedule, and they have tons of liquidity. And maybe the Brooks Brothers situation will help them.”
Tailored Brands declined to comment on its future plans.