Digital competition and a rapidly evolving consumer landscape are sending fashion firms to the negotiating table at a quick pace, but experts say those same factors call for an unprecedented level of precision on the part of dealmakers this time around.
“When the market becomes more challenging, there is an uptick in M&A activity [because] weaker firms are looking for lifelines, and that’s what we’re seeing right now,” explained Camilo Lyon, an analyst with Canaccord Genuity.
In the past six months, several smaller footwear brands have switched hands: Caleres closed out 2016 with a buyout of men’s brand Allen Edmonds; Marc Fisher Footwear purchased Easy Spirit in January; and Steve Madden snapped up family-owned Schwartz & Benjamin a few weeks later.
Earlier this month, U.K.-based Pentland Brands picked up a majority stake in California-born casual-sneaker label SeaVees.
“This is a bifurcated market, in that the strong will survive and reap the benefits of either acquiring strong brands at attractive multiples, or they’ll survive and benefit from competitors going away altogether,” Lyon added.
Market challenges and a lack of strategic partnerships have already sent a number of footwear-and-apparel firms packing over the last two years. And Susquehanna Financial Group analyst Sam Poser said flawed dealmaking is a likely culprit.
“A lot of these private-equity firms, for example, come in and they have dreams of grandeur but realize that they can’t execute them,” Poser said. “And we’ve seen the results. We’ve actually seen companies go away — as in the case of Eastern Mountain Sports, Bob’s Stores, Wet Seal and Sports Authority — because of private-equity ownership.” (EMS, Bob’s, Wet Seal and Sports Authority have all filed for bankruptcy.)
At the same time, the staggering speed at which e-commerce has exploded and gobbled up market share from the brick-and-mortar channel has stifled even the most seasoned retail players.
In a bid to find more stable footing in this new age of retail, Wal-Mart has been on a digital shopping spree, picking up Jet.com in August, the e-tailer ShoeBuy in January and brick-and-click outdoor retailer Moosejaw last month.
“Wal-mart is the biggest retailer in the world, and they have absolutely no choice but to look for ways that they can become a stronger competitor digitally with Amazon,” said Antony Karabus, CEO of HRC Retail Advisory. “They’re doing the right thing by finding these niches where Amazon is strong, such as in footwear.”
When Wal-mart announced its $70 million purchase of ShoeBuy through its Jet.com arm in January, company spokesperson Ravi Jariwala told Footwear News that the buy was characteristically strategic.
“Apparel and accessories is now the No. 1 category for digital commerce, surpassing computer hardware for the first time last year,” Jariwala said. “ShoeBuy’s expertise will help accelerate Jet’s footwear business and enhance our overall customer experience through a large assortment of products, strong industry relationships, and rich content and product descriptions.” (To sweeten the pot, Wal-mart also offered interested ShoeBuy suppliers an option to expand their consumer reach by also selling on Jet.)
SHUFFLING THE DECK
While several firms are taking advantage of opportunities in the buying market, many are also taking steps to scale down their bloated portfolios.
The Finish Line, which offloaded JackRabbit in January, and Weyco Group, which announced on March 8 that it’s placing its children’s footwear brand, Umi, on the selling block, are focused on rationalizing their portfolios through divestiture.
Following several rounds of lackluster earnings, Deckers Brands last month attracted the interest of activist hedge fund Marcato Capital Management, which picked up a 6 percent stake, or 1.9 million shares, in the firm.
Marcato disclosed in a filing with the U.S. Securities and Exchange Commission that it intends to engage with the firm’s leadership on “various operational initiatives or broader strategic initiatives including, but not limited to, potential acquisitions or sales of/or involving [Deckers] or certain of [its] businesses or assets.”
There had been chatter for some time that Deckers or, at the very least, several of the brands in its portfolio — Teva, Sanuk, Ahnu, Hoka One One, Koolaburra and breadwinner Ugg — were on the selling block. Marcato’s move further fueled the speculation. But Poser said he views the 6 percent stake as an avenue for managerial changes and doesn’t anticipate a full-on takeout.
“Strategic acquirers want to buy a company with a seasoned merchant and product team,” Poser said. “The Ugg brand, which makes up 83 percent of Deckers’ revenue, needs to be tuned up a great deal before a strategic suitor is found.”
Meanwhile, after months of sales speculation, Kate Spade confirmed in February that the company is exploring strategic alternatives.
So far, Coach and Michael Kors have been tossed around as potential suitors, but Canaccord’s Lyon said he believes private-equity ownership would be the most likely scenario for the brand: “I think private equity is probably the most logical suitor — I know the strategics [Kors and Coach] are looking at [Kate Spade] but I’m not convinced that they would actually pull the trigger.” (Conversely, B. Riley & Co. analyst Jeff Van Sinderen sees the handbag maker going to Coach.)
In the luxury-goods channel, a Coach and Burberry merger has also been floating around the ether, but that hasn’t shaped up, Lyon noted.
Lightweight clog-maker Crocs also stirred M&A chatter when it reported yet another quarter of losses and weak sales on March 1.
In addition to rationalizing its fleet, Susquehanna’s Poser said he believes the brand’s management should consider a sale.
“Crocs’ business may be better served within a larger portfolio of brands,” Poser said. “That way, corporate, back office, and other expenses can be absorbed by the larger entity. Additionally, under a larger company’s umbrella, Crocs may also be able to shed its manufacturing assets in Mexico and Italy.”
But for now, Poser added, “the company’s inability to shed its burdensome leases meaningfully detracts from the case for a strategic suitor.”
WHEN THE CHIPS ARE DOWN
Department stores have been among the hardest hit by consumer shifts toward online and experiential spending.
To address the challenges, Macy’s, JCPenney and Sears have implemented layoffs and store closures, but Macy’s has reportedly taken things a step further — signaling an interest in joining the selling block. (CEO Terry Lundgren — who stepped aside on March 23 — reportedly said the firm had become open to offers from potential friendly buyers.)
“Macy’s is pretty interesting because of their real estate, but finding a buyer willing to pay what [the department store] believes is fair could slow down the process,” explained Van Sinderen. “There are not a lot of potential strategic acquirers for Macy’s outside of Hudson’s Bay Company.”
After posting its sixth consecutive quarter of declining sales, luxury department store chain Neiman Marcus placed its struggling business on the selling block. The firm said on March 14 that it is evaluating strategic options, and reports have since surfaced that HBC is in talks with the retailer about a potential merger.
Only time will tell, but looking ahead, experts say retail’s challenges are likely to linger, which — along with the current administration’s promise of corporate tax cuts — will further spur M&A activity.
In addition to rightsizing their fleets, analysts suggest that finding healthy partnerships and synergies may be the best bet for brands and retailers hoping to capitalize on opportunities and power through.
“I’d like to see more strategic consolidation that creates healthier companies,” Van Sinderen said. “The U.S. is way over-stored and that is creating an environment where smart acquirers can [purchase] assets at more reasonable prices —versus recent years — and create leverage in their businesses.”
He added, “Synergies and economies of scale will become apparent, but it is going to take some time for things to play out.”