Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Consolidation in the Retail Industry
In recent months, the retail industry has been home to a number of consolidation agreements. Indeed, companies have been exploring their options amidst an uneasy economic environment. In some cases, retailers have found it worthwhile to make purchases that add to their current offerings or broaden their scope of reach. In other instances, companies have become the objects of purchase.
There have been several acquisitions specifically in the shoe industry. In late June, Nashville-based Genesco Inc. (GCO) completed its acquisition of British footwear company Schuh Group for $112.6 million, along with the adoption of $47.1 million of outstanding debt. This acquisition opens a number of doors for Genesco, while bringing only a small amount of additional debt.
Geographically, Schuh has a good customer base in the United Kingdom, as well as in Ireland. This acquisition makes a nice contribution to Genesco’s goal of global expansion, marking its first move out of North America. Operationally, the management team at Schuh holds commitment to the consumer as the primary focus of the business. The British retailer sells most of its products at full price, similar to what Genesco does at Journeys stores. Moreover, Schuh has a wide range of branded products, as well as a strong e-commerce business, hosting one of the largest online shoe stores in the U.K. All told, Schuh Group ought to add over $0.30 a share to Genesco’s earnings next year.
After acquiring Betsey Johnson in the third quarter of 2010, Steven Madden (SHOO) continued its shopping spree with two purchases announced in May. First, the company bought privately-held The Topline Corporation for $55 million in cash. The deal is subject to working capital adjustments, as well as an earn-out provision, which depend on financial performance through fiscal 2012 (ends June 30, 2012). Topline was a competitor of Madden’s which designed, manufactured, and marketed branded footwear. In addition to eliminating a competitor, the acquisition also brought the addition of Report brands to Steve Madden stores. Moreover, Topline is expected to add between $0.05 and $0.07 a share to Madden’s bottom line, at the end of its first year onboard.
Steve Madden’s alternative acquisition came shortly after, when the company purchased another privately held retailer, Cejon, for $30 million in cash. This deal was subject to similar terms as the Topline acquisition, but additional payments are contingent on the business’ financial performance through fiscal 2016 (ends June 20, 2016). Cejon specializes in designing and marketing cold-weather and trend accessories. In its first year under Madden, Cejon is expected to boost earnings by $0.07 to $0.09 a share.
Timberland Co. (TBL) had a fate opposite to that of Steve Madden. Instead of making strategic purchases, TBL was the subject of an acquisition, which does not come as a surprise, as Timberland had sought out a buyer once before, in 2006. VF Corporation (VFC), one of the world’s largest apparel manufacturers, was on the other end of the deal, agreeing to buy Timberland for $43 a share, or approximately $2.0 billion.
The acquisition was the largest of its kind in VF’s history, which has a lengthy life of 112 years. Management at both companies have shown excitement for the deal, which is scheduled to close in the current quarter. The transaction is likely to set the stage for the emergence of an outdoor apparel and footwear giant and should boost VF’s earnings by $0.90 a share in 2012. Moreover, Timberland had no debt on its balance sheet, thereby enhancing the appeal of the acquisition.
In another part of the retail world, J. Crew Group agreed to go private through an acquisition by TPG Capital, L.P. and Leonard Green & Partners, L.P., collectively known as Chino’s Holdings Inc. and Chinos Acquisition Corporation. The retailer was purchased for $43.50 per share, which represented a 29% premium over the stock’s preannouncement closing price and totaled roughly $3.0 billion. Shareholders approved the transaction March 1, 2011, and it was completed six days later.
J. Crew was not the only retailer to enter the private sector. In February of this year, BJ’s Wholesale Club (BJ) announced that it had agreed to also be acquired by Leonard Green & Partners and CVC Capital. Under the terms of the deal, shareholders would receive $51.25 per share, summing to $2.8 billion. The price is a 38% premium to the stock’s closing price on June 30, 2010, which is one day after Leonard Green assumed a 9.5% ownership stake in the company.
The movement of these retailers to the private sector should allow them to focus more on company operations with the help of their new partners. However, it is the nature of these acquired companies themselves that made these purchases materialize.
Private-equity firms have an appetite for companies that will generate a meaningful return on investment, and eventually cover the cost of the purchase. J. Crew and BJ’s Wholesale are likely to do just this. J. Crew brings forth loyal customers who will likely continue to purchase the higher-end, preppy clothing. Consequently, the brand should be able to maintain and/or lift its annual revenues. Too, at the time of acquisition, the company had no long-term debt.
BJ’s Wholesale has a similar description. Annual revenues have surpassed $10 billion in the past couple of years, and it appears that they will reach, or exceed, $11 billion in the short term. Further, BJ’s had $1.0 million in debt on its balance sheet, which is negligible when compared to the company’s large net worth.
As consumer confidence and the condition of the economy continue to waver, it is probable that further mergers and acquisitions will take place in the retail segment. In fact, there are a few companies out there that have some of the same characteristics as those that have been recently purchased.
First, True Religion (TRLG) is a small retailer, offering a wide range of apparel under one brand name. Too, the company has a clean balance sheet. A larger retailer may look at True Religion as a nice addition to its assortment of brand names, similar to the purchases executed by Steve Madden.
Next is American Eagle Outfitters (AEO). Similar to True Religion, American Eagle has zero debt and has brought in about $3.0 billion in annual sales over the past several years. This could make the company a target for private equity firms. On the other hand, however, AEO has a nice amount of capital that it could employ to make an acquisition to add to its repertoire of name brands.
Finally, we have Talbots Inc. (TLB). The specialty retailer of classic women’s apparel has not been performing too well in recent quarters, suffering from gross margin pressures and weakening sales. Too, the company’s debt obligations significantly outweigh its cash assets. Given its current situation, and the fact that Sycamore Partners, a private-equity firm, recently announced a 9.9% stake in the retailer, we would not be surprised to see it explore strategic alternatives.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.