R3: REQUIRED RETAIL READING
August 10, 2010
TODAY’S CALL OUT
It’s been relatively quiet on the M&A front in retail of late, but Hanesbrands is breaking the silence this morning with the acquisition of Gear for Sports, a leading seller of licensed apparel in collegiate bookstores. While modest in size at $225mm, our view is that this is a net positive event for the company – here are a few things to consider:
- Clean – low integration risk given existing relationship between the two companies.
- Opportunity for scale – with only three brands in its portfolio (GEAR FOR SPORTS, Champion, and Under Armour), HBI can provide product with favorable cost dynamics. Plus eliminating the middle man (i.e the wholesale/distributor process) margins will be inherently higher on HBI brands.
- Higher margin –11%+ EBIT margins at Gear for Sports. HBI hasn’t posted double-digit margins since 2003 and the company is buying the company for 7.5x, a multiple below where HBI trades currently ( 8.8x EV/EBITDA).
- Balance Sheet – leverage now moving in the opposite direction. After increasing debt for the first time since the spinout when the company reported Q2 results in July, this deal continues the trend adding $170mm in debt ($55mm in cash). The company still expects to end 2010 with a debt-to-EBITDA ratio of ~3.5x on a pro forma basis.
- Low Growth Business – While an average growth rate of 2% over the last two years isn’t shabby on a relative basis, this is not likely to be a true growth business once dust settles.
- Opportunity Cost – hitting the bid on a ‘distribution acquisition’ likely takes HBI out of the running for the opportunity to add a better known brand to the portfolio (at least in the near term).
The company will be hosting a call on the acquisition at 9am this morning (; code: 93137436). Among the items I’m more interested in clarifying is the proposed accretion related to the deal ~$0.20 in the first 12-months. On an absolute basis ($25mm in EBIT) that may be the case, but taking into account the opportunity cost in interest expense we are coming out closer to $0.08-$0.10. Either way, we view this morning’s acquisition which is both margin and earnings accretive as a positive near-term.
Details of the deal from the press release:
(FY10 ended in June)
- Sales ~$225mm
- EBIT $25mm+
- OM 11%+
- Expected to close in Q4 and be immediately accretive
- ~$0.20 in 1st 12 months
- ~$0.30 in 2nd 12 months
- No write-offs or restructurings needed, not dilutive to 4Q or 2010 earnings guidance of $2.25-$2.35
- Total cost of $225mm
- $55mm in cash
- $~$170mm in debt
- = ~7.5x EBITDA
- To pay for acq. Instead of debt
- Still projects 2010 debt-to-EBITDA ratio of ~3.5x on a pro forma basis
LEVINE’S LOW DOWN
- For those following the Jersey Shore, add Mike “The Situation” to the list of reality TV stars turned fashion mogul. The Situation is launching a casual sportswear line in conjunction with an existing brand known as DILLIGAF (it’s acronym that requires Googling). Retail partners have yet to be announced.
- In one of the more innovative uses of the iPhone app, The North Face launched Trailhead. The app lists trails and maps around the US, as well as allows users to track their movements via GPS. However, the most innovative feature comes with the weather forecasts. The app actually suggests which North Face clothing you should wear based on expected weather conditions over the users specified route.
- Add H&M to the list of retailers finally launching e-commerce. Similar to Zara, the retailer will launch in Europe first, on September 26. No word on timing for the US launch.
Li & Fung Ltd. Plans to Privatize a Hong Kong-listed Transport Affiliate - Li & Fung has been acquiring rivals and entering into supply agreements to help meet a sales target of $20 bn this year. Last month Li & Fung increased its funds for acquisitions to about $1.15 bn. Privatization will help cut operational costs for Li & Fung as IDS provides logistics and distribution. <bloomberg.com/news>
Hedgeye Retail’s Take: While not an acquisition of a “brand”, Li & Fung continues to invest in the tools needed to facilitate growth. Expect more content related deals to take place as the company diversifies its revenue and profit model away from the traditional “middle man” operation.
UK Clothing Sales in July Led by Menswear and Womenswear - Clothing sales picked up slightly in July, helped by summer Sales and promotions but . Retail like-for-like sales across all sectors increased by just 0.5% in July as shoppers’ fear of looming public spending cuts took hold while total retail sales were up 2.6%. Menswear and womenswear clothing led the improvement in clothing sales while growth in kidswear was steady but weaker than earlier in the year. Clearance and promotions helped boost sales but often at the expense of margins, the BRC said. Dresses, tops and skirts, lightweight knits and swimwear sold well during the month. Bags, jewelery and hair accessories were popular, particularly in clearance Sales. <drapersonline.com>
Hedgeye Retail’s Take: Kidswear/juniors apparel weakness is a common theme out of the UK and the US in July. Interesting to note how UK retailers boosted sales through promotions at the expense of margins while many US retailers hurt top-line due to fewer days of discounting.
UK Footwear Sales in July Slowed to Record Weakness Since August 2009 - Sales of men’s and kid’s shoes were down on last year for the first time since August 2009. Women’s footwear sales also slowed but continued to show a slight gain. Footwear sales were often discount-driven, with heavy mark-downs in clearance events to attract cautious shoppers. Sales of casual shoes and sandals were boosted by the warm weather but formal styles struggled. Autumn ranges which had already been brought into store had seen good early interest in new styles. <drapersonline.com>
Hedgeye Retail’s Take: Footwear weakness out of the UK in July marks a notable divergence from the commentary out of the US.
Not All Back-to-School Shopping Occurs in August - A new study finds that consumer interest in computer purchases peaks in July, while interest in the office and school supplies and apparel categories remains strong well into September. Shoppers start thinking about school supplies and apparel much earlier and stay engaged with ads later than what is generally understood to be the crunch month of August. The PointRoll survey tracked interactions with online advertisements from 2006 to 2009. The study suggests marketers in the office and school supplies and apparel categories may want to rethink their practice of cutting advertising spend sharply in late August. According to PointRoll, companies currently reduce their back-to-school advertising by 75% at the end of August before Labor Day. <internetretailer.com>
Hedgeye Retail’s Take: Retailers, for the most part, already know this. One thing to consider is that if computers sell the best in July but were noted as a category of weakness by COST and TGT, then be weary of over exposed electronics retailers like BBY.
Innovation is the New Buzz Word in M&A - There is a rush of companies searching for businesses that have the pulse of new consumers. New players are also entering the mix, making for some pretty interesting bedfellows. Take Wal-Mart Stores Inc., which bought video download site Vudu. Denim brand J Brand sold a majority interest, said to be worth more than $50 million, to Star Avenue Capital, a partnership between talent agency Creative Artists Agency and Irving Place Capital. And the Estée Lauder Cos Inc. acquired Smashbox, picking up expertise in digital, social media and television distribution, as well as a photo studio to boot. Looking beyond the traditional boundaries of fashion can lead to a big payoff. This emerging M&A model is a distinct departure from the traditional one, where retailer A buys retailer B, reaching new customers while realizing synergies. <wwd.com/business-news>
Hedgeye Retail’s Take: Or, the glass half empty view would be that companies have run out of synergistic opportunities and are now increasing their risk tolerance in an effort to potentially acquire “the next big thing”.
Men’s Wearhouse Acquires 2 Leading Providers of Corporate Uniforms and Workwear in the UK - Dimensions Clothing Limited and certain assets of Alexandra plc, two leading providers of corporate uniforms and workwear in the United Kingdom, were acquired for $97.5 mm. The companies will be organized into a U.K.-based holding company, of which Men’s Wearhouse will control 86% and certain existing shareholders of Dimensions will control 14%. The acquisition is expected to be accretive to earnings in fiscal 2010 and projected annual sales for the business are expected to be approximately $207.8 mm, in fiscal 2011.
Hedgeye Retail’s Take: How long before the “corporate uniforms” are replaced with suits in the UK?
Independent Retailers Feel Soft Sales and Credit Crunch - Retailers shopping the Cobb Show late last month at the Cobb Galleria here saw a slight uptick in business in the spring, but sales have been very sluggish this summer. The lack of availability of credit to small businesses is hurting retailers and vendors. Exhibitors said more manufacturers are requiring their retail customers to pay by cash on delivery, money order, company check or a credit card. Buyers were at the Cobb Show shopping for new trends for fall and looking for bargains. They wanted slimmer jeans, as well as other lifestyle looks, specifically board sports. <wwd.com/retail-news>
Hedgeye Retail’s Take: Sounds like the gradual (and profitable) shift in market share towards the better capitalized, larger chains is still underway. Having a balance sheet has become a key asset even in an environment that is stable.
July's Import Cargo Volume Expected to Increase 15% - The large double-digit increases in June and July appear to be the result of backlogs built up due to the lack of shipping capacity earlier in the year after ship owners took vessels out of service during the recession and were slow to return them as the economy began to pick up. With many retailers appearing to bring merchandise in early to avoid any further bottlenecks, July is likely to be the peak shipping month for 2010 rather than the traditional rush of holiday season merchandise in October. There are indications that the shipping season may have peaked earlier than normal as the rush to re-stock inventories earlier in the year intersects with a combination of increased shipping capacity, consumer confidence levels not seen since August 2009 and the slowing growth of consumer spending,” Hackett Associates founder Ben Hackett said. <sportsonesource.com>
Hedgeye Retail’s Take: Keep an eye out for building inventories earlier than expected as this suggests holiday build is coming early.
Nike Opens New Store in Santa Monica Place, CA - The new two-story, 20,000-square-foot location unveils Nike’s newest store concept, including the introduction of Nike+ Run Club and team customization services. The store is the first multi-category concept in the U.S. since the company opened its last NIKETOWN in 1999. <sportsonesource.com>
Hedgeye Retail’s Take: Putting the Nike store aside, this mall is supposedly one of the premier shopping venues to open in the last few years. In fact, it may be one of the only malls to open in the last few years!
Mizuno Corp Q1 Sales Strength Led by Europe and Americas - The Japanese athletic company cited athletic footwear as the largest contributor to growth. Revenue in Europe grew 14% and the Americas 15%, thanks to increased sales of footwear and baseball goods in those regions. <wwd.com/footwear-news>
Hedgeye Retail’s Take: Another sign that performance footwear remains strong.