Nine West, Authentic Brands and the future of apparel retail
Crippled by debt, Nine West went into bankruptcy this year. The company that bought the namesake brand has a flexible model that leaves it hungry for acquisitions.
The Nine West brand is entering its second life. With its former parent company (which still bears the same name) in Chapter 11, Nine West has joined the likes of Nautica, Airwalk and Shaquille O'Neal — as well as Elvis Presley, Marilyn Monroe and a couple dozen more — at Authentic Brands Group.
The $340 million acquisition is a descriptive one for this moment in retail. Nine West the operator, struggling under a debt pile from a private equity buyout, suffered financially with the decline in department stores and mall traffic. The retailer and wholesaler went bankrupt, while the brand holding company that bought the Nine West name has found success in keeping its books relatively clean of assets — and the capital expenses that come with them.
The price tag for Nine West and Bandolino — well above what ABG initially posited in its original, stalking horse bid — was a good example of how much value can remain in bankrupt retail brands. ABG reportedly had to outbid shoe retailer DSW to make the acquisition. Indeed, the price was so high that the Nine West company is now reportedly looking to sell the rest of its brands in bankruptcy rather than go it alone out of Chapter 11. Neither Nine West nor Authentic Brands responded to Retail Dive requests for comment.
With retail bankruptcies at Great Recession-era levels, plenty of intellectual property has gone up for sale. ABG is one of a number of players who are picking up the pieces, buying up brand properties and trying to breathe new life into them.
"You can build on your core brands. You can revitalize brands from prior eras."
Moody's Senior Analyst
"In this case, they have a couple of strategies here," Moody's Senior Analyst Brian Silver told Retail Dive in an interview. "You can build on your core brands. You can revitalize brands from prior eras." Here, Silver pointed to ABG's Vision Streetwear and the vintage celebrity intellectual property it controls, like that for Elvis Presley and Marilyn Monroe.
"And then you have these kinds, in which you have [ABG] turning around the challenges of the orphan brands, that essentially underperformed but have not fallen out of favor with consumers." Into that bucket would go Nine West, Bandolino, Nautica and others ABG has bought up, including Juicy Couture and Aéropostale, the latter of which ABG also bought out of bankruptcy.
Authentic Brands' 'm.o.'
This category — the orphans — has been growing with the ranks of failed retailers in recent years. In an April report, Silver and his team wrote that ABG will "remain on the prowl for acquisitions in a beaten down apparel sector," which "presents myriad opportunities at potentially favorable valuations." The analysts noted that ABG bought four brands last year (Greg Norman, Frye, Neil Lane and Herve Leger) and opened the year with two pending deals (Nautica and the NIne West brands).
ABG's "m.o.," according to Silver, is to assess the identity of the brand and then use targeted marketing to drive consumer awareness. ABG also typically looks to expand brands into international markets and through e-commerce.
Key to making this all work is picking the right firm to actually make the stuff the brand is attached to. ABG keeps its books light by owning little of its own capital and instead licensing out the brands to wholesalers who are on the hook for inventory, production, distribution and retail leasing. The setup keeps ABG's assets and risks light and leaves its margins high, as it makes most of its money through royalty payments.
The model also creates a symbiotic relationship between ABG and its licensees. "When a licensee succeeds, ABG succeeds," Silver said.
That means ABG has to pick its partners wisely and keep a diverse stable of licensees, as well as manage its relationships and keep a watchful eye on its partners' operations. Silver said ABG has veto power with licensees over most decisions relating to its brands and approves channels for its products.
To succeed, ABG also has to take care not to rely too much on any one brand. To that end, it's bought more than 30 brand properties over the course of its life. The company also has to be cautious that its brands, in the main, don't rely too much on any one retail channel. As Silver pointed out, this hurt one of ABG's primary competitors, Iconix Brand Group. Iconix recently took a hit when Target dropped its Massimo brand and Walmart dropped Danskin.
So far the licensing model has worked for ABG, which was founded in 2010. The company — privately held by private equity firms Leonard Green & Partners, L.P., General Atlantic and Lion Capital — does not report financial numbers, but according to Moody's, ABG has more than tripled its top-line revenue in the past four years, from $107 million in 2013 to around $340 million in 2017.
Much of that growth has come through acquisitions, and many of those acquisitions — true to form for private equity ownership — have been financed with debt. The company's total debt load last year was about 6.6 times its EBITDA (earnings before interest, taxes, depreciation and amortization), according to Moody's.
Even with that debt, though, ABG generates "solid cash flow" through its revenue model, Silver said in the April note. And the lack of leases and other capital expenses removes some of the risks that have driven other retailers and brands into bankruptcy.
A brand that 'still matters'
In the Nine West brand, ABG got an entry point into the shoe category but also a brand that declined in recent years. That was at least partly due to slowdowns in mall traffic and a $1.6 billion debt load — leftover from the leveraged buyout of the Jones Group that created the Nine West holding company — that became an increasingly toxic problem.
Yet decline is not the same as death. "The [Nine West] brand still does matter," Cort Jacoby, a partner in A.T. Kearney's consumer and retail practice, told Retail Dive. "Nine West has a strong following out there."
Traditionally the brand was an "upscale fashion shoe," though it has faced pressure as more consumers have turned to off-price and digital channels, Jacoby said. Ray Hartjen, head of marketing for RetailNext, said the Nine West brand typically appealed to "women starting careers, who needed to change out Chuck Taylor All Stars" for dressier shoes, as well as a "mall-wear" brand for women who needed a quick set of dress shoes for the weekend.
"[Nine West is] kind of a brand that lost its way as shoppers changed."
Head of marketing for RetailNext
The last few years have found Nine West "stuck in the middle," Hartjen said. "It's not value, it's not luxury," he said. "It's kind of a brand that lost its way as shoppers changed." Meanwhile, he added, the brand's retail stores — which the company shuttered in bankruptcy — were full of discounts and "not merchandised particularly nicely," Hartjen added. In a bankruptcy filing, Ralph Schipani, Nine West's interim CEO, described Nine West's retail operation as unprofitable, and chalked up many of Nine West's wholesale problems to the "difficult department store environment."
Despite all this, ABG and others saw value in the brand. ABG CEO Jamie Salter in a statement when the acquisition closed that his company had "received an outpouring of interest from retailers, distributors and new licensing partners" around the acquired brands.
Looking ahead, ABG has said it plans to "enhance the [Nine West and Bandolino] brands' relevance through refreshed creative, engaging digital campaigns and key influencer partnerships." ABG also plans to expand both the brands into new categories, including sportswear, outerwear, swimwear, intimates, fragrance, sleepwear and home.
Stuck in the middle
The company's original plan in bankruptcy was to sell off Nine West and Bandolino to pay down some debt and then restructure the business around the remaining brands. Schipani said at the time of filing for Chapter 11 that in "the same challenging macro retail environment" that Nine West faced, "One Jeanswear Group, Kasper Group, The Jewelry Group and Anne Klein businesses have demonstrated stability but insufficient growth to offset the negative operating performance in the debtors' footwear and handbag businesses." That stability, he added, was due to a "combination of expense controls, margin improvement, and the launch of new and successful licensed and owned brands."
The money ABG ponied up for the company's marquee brands has reportedly given the bankrupt Nine West holding company hope that it can sell off its remaining brands. Reuters reported earlier in July that Nine West is working with investment bank Lazard to explore a possible sale of itself as a whole or in pieces.
"I can understand how Nine West would go, ‘Hold it. We just got a boatload of money, maybe we can sell the other brands,'" Hartjen said. As with Nine West, the holding company's other brands are also "kind of stuck in the middle," between luxury and discount, Hartjen said.
And that's a bad place for both a retail and wholesale brand to be these days, as incomes and shopping habits bifurcate, lower tier malls close and off-price retailers cover the country with new stores.
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