THE RETAIL BREAKUPS: GIANTS THINK SMALL TO GROW EVEN BIGGER

Byline: Valerie Seckler

NEW YORK — Breakup fever is spreading among diversified apparel retailers who are finding it harder to run all parts of their conglomerates effectively.
The Limited became the latest retailer to hop on the breakup bandwagon, when it disclosed on Tuesday a plan to reconfigure its businesses, possibly this fall, as reported.
Retailers that have followed similar strategies over the last few years include:
Sears, Roebuck, which spun off Allstate insurance and Dean Witter banking units.
Kmart, which shed Sports Authority and is close to completing spinoffs of Borders and Waldenbooks.
U.S. Shoe, which agreed this month to sell its footwear division to Nine West.
“All but Kmart have seen dramatic increases in shareholder value and have reaped tremendous rewards from becoming much smaller, more focused entities that can ‘incentivize’ management with stock,” said Todd Slater, analyst at UBS Securities.
Now analysts are speculating that Edison Brothers, Woolworth and Melville could join the fray.
They noted that Melville has recently been under shareholder pressure to maximize value and that Woolworth’s new chief executive officer Roger Farah could easily sell, close or spin off some of the retailer’s numerous operations. Analysts speculated Melville could spin off Marshalls and Woolworth could spin off Champs, among other operations.
Edison Brothers said Wednesday it has no plans to break up its business, beyond its recently disclosed deal to spin off its Dave & Buster’s restaurant/entertainment chain. Officials at Melville and Woolworth couldn’t be reached for comment.
Weak performances by some divisions of diversified retailers, resulting in undervalued stock prices, are driving the breakup trend, analysts noted.
“For some reason, even a well-run company like Dayton Hudson has problems getting all of its gears to work well at the same time,” observed Peter Schaeffer, analyst at Dillon Read. “A weak performance at Mervyn’s hurts the whole company.” Analysts continue to suggest that DH could sell its department stores, though DH officials have repeatedly denied they have any plans to do so.
“Today, as businesses grow more rapidly, separate divisions need their own infrastructures and the company’s stock price is hurt by weaknesses in individual operations,” Schaeffer said.
U.S. Shoe’s stock, for instance, has jumped from 13 to 26 in the last year, in the wake of moves to break up the company through an agreement to sell its footwear unit to Nine West.
The breakup stakes are highest in apparel retailing. These companies generally experience uneven sales patterns due to fashion trends, which ultimately takes a toll on the stock price.
That’s been the case at Limited, which plans to create, through partial spinoffs, two new business entities; one from its core women’s group and the other from its lingerie and personal care retailing businesses. Its other chains will remain under the corporate umbrella.
“If all cylinders were working now, Limited wouldn’t be doing this,” said Schaeffer. “They’re under pressure to shore up the stock and haven’t been successful with their operating strategy.”
Limited stock closed at 21 3/4 on the New York Stock Exchange Wednesday, down 1/4, and has traded between roughly 22 and 17 for the last 18 months. It was the sixth most active issue on the exchange.
While analysts said the plan could boost Limited’s stock price, they predicted a bigger lift would come following total spinoffs of the new units.
They also forecast such a move could come in the next year or two — after Limited fully repairs its core women’s business, where Express has turned around, but Lerner New York and Limited Stores continue to struggle.
“This could lead to eventual tax-free spinoffs of the women’s and personal care units to shareholders a year or two down the road,” said Slater of UBS Securities. “We’d be naive to assume [total] spinoffs won’t follow.”
“If this is all there is, the market won’t pay up,” said Alan Lafer, partner in Lafer Management Corp., a private investment firm in New York. “Wexner needs to fully separate the new businesses from Limited in total spinoffs. A third step could be spinoffs or IPOs of individual chains.”
Wexner himself has hinted such moves are possible down the road, depending on market conditions and the maturity of his businesses.
“Limited is a company people love to hate, but they want to like it,” Lafer said. “In the beginning Limited made people lots of money, but management hasn’t done so well in creating value over the last several years.”
Barry Bryant, analyst at Ladenburg, Thalmann, said the Limited’s breakup plan is not a strategy “to improve operational efficiency. The underlying issue is [stock] price.”
“Also, I think Wexner wants recognition for having built not one or two but a string of successful specialty businesses,” including Victoria’s Secret, Bath & Body Works, Structure and Abercrombie & Fitch, Bryant said. “I think he’s frustrated nobody is giving him what he feels is just recognition for developing these high-growth specialty retail businesses.”
For his part, Bryant doesn’t anticipate a complete breakup of the company in the foreseeable future. “Whatever they sell or spin off, I don’t think Wexner will give up majority control soon — unless he has a sudden change of heart.”
In any event, analyst Walter Loeb said splitting the businesses increases Limited’s flexibility and makes it “more likely something will be added to the portfolio or sold.”
Improvement in the core women’s business enables Limited to split up its businesses, said analysts, who noted more work needs to be done, especially at Lerner’s and Limited Stores.
“I think Wexner can’t help but be frustrated by the performance of Limited’s flagship chain and Lerner’s, even though he’s had lots of successes,” Bryant said.
Dillon Read’s Schaeffer said he’d rather see Limited focus on restoring the health of its core women’s business than boosting the price of its stock: “I think that repair work was needed more than restructuring at this point.”
Loeb voiced similar criticism of Limited’s merchandising strategy, saying the stores “still have a me-too attitude, mimicking retailers like Banana Republic and The Gap.”
“A merger of Limited and Express would make sense,” said Schaeffer, noting it would allow Limited to consolidate buying staffs and free up real estate for its more productive store formats like Structure, Abercrombie & Fitch and Bath & Bodyworks.
“The Limited’s breakup puts more on the operating presidents to perform and on the company’s stock,” said Schaeffer, noting Limited Inc. will continue to own 85-90 percent of the two new units. “What if Victoria’s Secret slows down and women’s apparel doesn’t do better?” — Fairchild News Service