“Brand Recognition – The Private Equity Dash for Retailers in Q1 2011”

The First Quarter of 2011 saw a wave of private equity firms either showing interest in retailers or participating in a string of retailer acquisitions. Leonard Green & Partners left the checkout aisle with Jo-Ann Stores in tow, paying $1.6 Billion for the transaction. Later the firm would be seen in a consortium deal for J. Crew Group, partnering with TPG Capital to put up a $3 Billion offer.  Recently, there has been a lot of buzz around LGP’s due diligence into BJ’s – giving rise to speculation that the deal could be worth $60-$80 per share if a deal were to take place. In the high fashion world, Castanea Partners has been making acquisitions – securing both Donald J. Pliner and Astor & Black Custom Clothiers in the span of two weeks. In the midst of this action Privalia, an online fashion retailer with strong positions in Europe and Mexico, acquired Germany’s Dress For Less with support from private equity firms General Atlantic, Highland Capital Partners, Index Ventures, and Insight Venture Partners in a deal that could be worth as much as $280 Million. It’s clear that investors have placed their bets on the retail market, and more importantly the all-important consumer…but how secure is that bet?

 Fairly secure in the eyes of those who believe in the power of brand. “Brand,” as one private equity veteran stated, “is enough to get customers – and new customers – in a down economy.” If one were to follow this logic to its inevitable end, this would mean that certain “brands” would be able to not only attract new customers in a slower economic climate but also “rebound” once economic conditions improved. Basically, retailers such as Jo-Ann Stores and J.Crew would retain a good amount of their cache, and once economic conditions return to profitable levels, an investor could sell their holdings for a reasonable profit. In the case of investments like Dress For Less or Astor & Black, investors can take advantage of the benefits of stylish, forward thinking symbols and clear market share leaders in their respective niches. These retailers and investments have brand recognition, which translates into brand loyalty, which for investors translates into a modicum of certainty and stability but more importantly, potential for growth.  In a recent press release concerning their acquisition of Donald J. Pliner, a premier designer and marketer of luxury footwear, Castanea’s Brian J. Knez, Managing Partner said, “Donald J Pliner is a terrific investment opportunity for us…this new partnership provides the Company with the resources to accelerate its growth and enhance the prominence of the brand.”

All indicators would suggest that investors should follow suit with all due haste, but there are concerns that do arise when looking at the surge in retailer buy-outs, especially when considering the acquisition of BJs  or even Big Lots Inc. and Family Dollar Inc., who have also been flirting with the idea of participating in a buyout.  Both Big Lots and Family Dollar are known as low end discount retailers who operate under tight margins. And one wonders whether or not they can retain their customer base in the face of further economic stability.  One would think even interested, offer-toting parties feel this way. Perhaps this was the reasoning behind PE firm Trian Group’s offer to Family Dollar. As of this writing, the board at Family Dollar had turned down the offer from Trian, citing that at $55-$60 per share the offer seriously undervalued the company. For now, Family Dollar seems to be off the shelves.  However, Big Lots is still in play, after a strong fourth quarter of sales and earnings. Looking at the buyout possibilities, Big Lots has upside – operating strength and valuation multiples are in Big Lots‘ (or an acquirer of Big Lots) favor. But if brand strength and recognition are the key ingredients in recent retailer buyout recipes, it would seem that retailers such as American Eagle Outfitters, Inc. (who demonstrate stronger brand loyalty and roughly equivalent valuations) would be the better and safer play.