Boutique Appeal

Last updated: Cover Story

Against the backdrop of department store consolidation, retailers and investors seek specialty shops

To protect themselves from fickle consumers and uncertain economic times, retailers are using acquisitions of specialty shops as a form of insurance. Deals such as Gap Inc.ís (NYSE: GAP) $130 million purchase of retail chain Intermix Holdco Inc. in January allow middle-market companies to break into new segments of the market. (For more, see the video below with Hadley Mullin of TSG Consumer Partners.)

Through September, 2013 has been a big year for department store deals, with about $9 billion in deal value according to data from Dealogic and provided by investment bank Robert W. Baird & Co. The year through September has seen nearly $21 billion in total retail M&A activity, which includes department store deals.

The third quarter was especially strong for U.S. retail and consumer transactions, rising 112 percent from the same quarter in the previous year, according to PwC.

ďI see more opportunities in the specialty retail space than I do in the department store space,Ē says Al Ferrara, a partner at BDO USA LLP. Deals are coming from private equity firms that bought a retailer three to five years ago and are looking to exit, or the stores themselves, which may be looking to move into a specialty niche through acquisition, Ferrara says.

Gapís Intermix purchase underscores that idea. By buying Intermix, a group of clothing stores that sell womenís luxury apparel, the company enters an entirely new space. When Gap made the acquisition, Intermix operated 32 boutiques across North America. Gap says it is seeking to expand the brandís network of stores and enhance the companyís website. Stores are scheduled to open soon in Chestnut Hill, Mass., Brooklyn, N.Y., and Bellevue, Wash.

ďSmart companies are trying to bulletproof themselves by having concepts at different price points and target audiences; therefore, if one should face headwinds, you have the others,Ē says Jane Hali (pictured), vice president of custom research for London-based trend forecasting agency WGSN Group Inc., about the Intermix deal.

Gap has businesses at all ends of the market. It has Old Navy at the low end; Gap in the middle; Banana Republic† in the middle but above Gap; Athleta, which gives them a specialization in a specific market; and Piperlime, a pure e-commerce business. The acquisition of Intermix adds a specialty store, with a very select assortment of clothes, to Gapís holdings. The deal was Gapís first since 2008, when it paid $150 million for Athleta, which sells exercise clothes. The company bought Banana Republic in 1983.

In October, rumors swirled that suit chain Menís Wearhouse Inc. (NYSE: MW) may bid for shoemaker Allen Edmonds Corp. in a move that could strengthen the chain. That news came around the same time that Houston-based Menís Wearhouse rejected a $2.3 billion takeover offer from Jos. A. Bank Clothiers Inc., which also operates a chain of retail stores. If that deal had not been rejected it would have expanded Jos. A. Bankís product offerings into tuxedo rental and casual wear. In July 2012, Menís Wearhouse acquired menís clothier Joseph Abboud through a $97.5 million deal for its owner, JA Holding Inc.

Specialty retailers have also attracted the interest of private equity firms.

Private Equity Involvement

In October, London-based private equity firm Permira Funds agreed to buy the parent company of Dr Martens, R Griggs Group Ltd., for about $486 million. Dr Martens makes apparel, shoes and accessories sold in 63 countries. Permira has also invested in Hugo Boss AG and Valentino.

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