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Retail discussion material

Sai Summer
Sai Summer

The document summarizes recent market trends in the US retail and apparel retail sectors: - The 2010 holiday retail season saw strong sales growth of 4.1% compared to previous years, led by an 11.2% increase in clothing sales. However, rising cotton and production costs may force retailers to raise prices in 2011. - M&A activity in the apparel sector has slowed but is expected to increase as strategic buyers seek growth through acquisitions. The acquisition of J. Crew in 2010 for $3 billion represented a premium to its stock price and leveraged the company's growth potential. - Recent retail sales figures from 2001-2010 show overall growth, with apparel retail sales growing from $119

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Apparel Retail Discussion Materials Consumer Retail Group February 15, 2011
Market Trends US Retail Industry Update Current market trends in Retail Industry: Pent-up demand, a rising stock market and incremental improvements in the overall economy led to a solid holiday season in 2010. The combined November/ December sales roses 4.1%, representing the best holiday comps since 2006 The level of consumer confidence is moving in two directions: with higher-income consumers spending again but still seeking value, and lower-income consumers remaining cautious on spending. Clothing sales were particularly strong, posting gains of 11.2% Apparel goods are likely to skyrocket due to increasing cotton prices and labor costs in China. The retailers will likely have no choice but to pass along increased costs to consumer, which would negatively impact unit volumes. 2 NAICS Code 4481 Adjusted Annual Sales for seasonal variations and holiday and trading-day differences, but not for price changes. Source: US Census as of February 15, 2011 http://www.census.gov/retail/mrts/historic_releases.html US Retail Industry Structure Internet Retail Discount Stores Department Chains Food Retail Restaurants & Food Services Catalog & Specialty Distribution Specialty Foods & Food Products Furniture & Furnishings Retailers Apparel & Footwear Manufacturers Footwear & Accessories Retailers $3,386 $3,467 $3,618 $3,841 $4,093 $4,313 $4,454 $4,409 $4,129 $4,398 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 US Retail Industry Annual Sales 2001-2010
Market Trends US Apparel Retail Sector Overview 3 Current market trends in Apparel Retail Sector: Apparel sales were particularly strong during the 2010 holiday season, rising 11.2%, more than 10 times pace of the previous year. Consumers have been continuing to invest in trusted brands Rising cotton prices are expected to impact end consumer prices in 2011. While hesitant to raise prices in a difficult economic environment, both retailers and wholesalers appear to have recognized the need to take pricing action in order to limit margin declines The M&A sector has focused mainly on strategic buyers who continue to target opportunities to grow via acquisitions NAICS Code 4481 Adjusted Annual Sales for seasonal variations and holiday and trading-day differences, but not for price changes. Source: US Census as of February 15, 2011 http://www.census.gov/retail/mrts/historic_releases.html $119 $123 $128 $136 $145 $154 $162 $159 $152 $159 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 US Apparel Retail Sector Annual Sales 2001-2010 in Billion Work Casual Denim Going Out American Eagle American Eagle Abercrombie & Fitch Abercrombie & Fitch Urban Outfitters Urban Outfitters Forever 21 Forever 21 H&M H&M Express Express Express Express Guess Guess Bebe Bebe Gap Gap Banana Republic Banana Republic Banana Republic J. Crew J. Crew Teens Late 20s/ 30s + 20-30s Source: Company data, UBS EXPRESS Equity Research Report.
Market Trends Apparel Retail Market Activity 4 Observations M&A activity in Apparel has been more than halved in 2010 compared to 2005. However, M&A activity in Apparel Retail sector is not expected to remain at current levels as we continue to see signs of a healthy backlog of transactions building in the space. Large strategic buyers continue to target opportunities to grow via acquisitions, as organic growth continues to face headwinds, given that consumers are cautiously increasing their spending. Source: Capital IQ* As of February 15, 2011 Source: Capital IQ* As of February 15, 2011 36 30 39 28 24 18 2005 2006 2007 2008 2009 2010 Apparel Retail M&A Activity Number of Transactions 8.6x 7.1x 7.4x 2.7x 5.3x 8.2x 2005 2006 2007 2008 2009 2010 Apparel Retail Multiples EV/EBITDA 3 6 2 2 3 7 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Apparel Retail Private Placements Number of Transactions Source: Capital IQ* As of February 15, 2011
Market Trends Nov. 2010 Acquisition of J. Crew Group 5 Analyst Commentary The acquisition of J Crew would make a highly appealing LBO, as the core company concept maintains growth opportunities Its a great deal for J. Crew shareholders since estimated takeover value represents a 28% premium to stand-alone fair value estimates. There are not many ways to grow the firm other than aggressive cost cutting and expanding into bridal and mens segments, as well as the Madewell brand Leveraged Acquisition Loans Asset Based Credit Facility Investment Considerations J Crew is a leading retailer with multiple sales channel: 220 retail stores, 85 factory outlets, 20 Madewell stores and online venue The company made $1.7 billion sales in 2010 A top industry management team (Millard Drexler) that can deliver great results Acquiring the firm at an attractive price at $43.50 per share (52-wk high of $50.96 in April) (1) Premium to Octobers average stock price. (2) LTM on date of acquisition. has been acquired by Transaction Value: $3.0 Billion Offer Price/Share: $43.50 Premium: 24.6%(1) Cash Consideration: Equity (38.7%) Debt (61.3%) PF Ownership: TPG (75%) LGP (25%) 2010E EBITDA Multiple: 9.6x LTM(2) 's EBITDA Multiple: 8.6x Financing: Term Bridge Underlying: NA Sr Unsecured Notes Proceeds Raised: $1.2 Billion $400.0 Million Maturity: 1/26/2018 NA Feature: NA 1YR SC@101% Coupon: L + 350 L + 800 Price: 99.25% NA S&P Rating: B CCC Moody's Rating: B1 Caa1 Proceeds Raised: $ 250.0 Million Maturity: 2016 Coupon: L + 250 Acquirers took advantage of cheap debt and increasingly regard the stock market as good value J. Crew Group was acquired at its top performance stage as a result, this acquisition strategy depends on potential future growth rather than a simple management turnaround strategy
Market Trends Recent M&A Activity in the Apparel Retail Sector 6 Source: Capital IQ as of February 15, 2011. Closed Date Acquiror Target Target Description Enterprise value EV/ EBITDA 11/23/10 (Announced) Leonard Green & Partners, L.P. and TPG Capital J. Crew Group, Inc. (NYSE:JCG) J.Crew Group, Inc. is a multi-brand, multi-channel, specialty retailer. The company offers an assortment of women's, men's and children's apparel and accessories. The company conducts its business through retail, factory, clearance, crewcuts, and Madewell stores, catalogs, and on its Website. $2,679.4 8.4x 1/4/11 LF USA Inc. Oxford Industries Inc., Substantially All of Oxford Apparel Business Oxford Apparel Business produces branded and private label dress shirts, suited separtes, sport shirts, casual slacks, outwear, sweaters, jeans, swimwear, westernwear, and golf apparel. $121.7 NA 11/17/10 Lodis Accessories, Inc. Another Line, Inc. Another Line, Inc. designs, manufactures, and sells belts, and hangbags for women, offering chain and beaded, fabric, and leather and woven style belts. The company was founded in 1988 and is based in Lake Forest, California. $6.8 NA 11/15/10 Signature Eyewear Inc. Rough Justice Rough Justice manufactures designer footwear for women. The company's products include platforms, wedges, dress footwear, sandals, and flats. The company was founded in 2007 and is based in Inglewood, California. NA NA 11/4/10 KarpReilly, LLC Adrianna Papell, LLC Adrianna Papell, LLC designs, sources, and distributes day and occasion dresses under the Adrianna Papell, Aidan Mattox, and Hailey Logan labels. NA NA 11/1/10 Hanesbrands Inc. (NYSE: HBI) GFSI Holdings Inc. GFSI Holdings, Inc., through its wholly owned subsidiary, GFSI, Inc., engages in designing, manufacturing, and marketing sportswear and active wear bearing names, logos, and insignias. $225.0 7.5x 10/28/10 (Announced) Charles Komar & Sons, Inc. Carole Hochman Design Group, Inc. Carole Hochman Design Group, Inc. designs and manufactures sleepwear, loungewear, and daywear for women. The company was founded in 1930 and is based in New York, New York. NA NA Selected M&A Transactions for the Last 2 Years
Market Trends 7.9x 7.9x 7.8x 6.6x 7.9x 8.2x 8.1x 8.9x 10.2x 8.8x 7.2x 12.2x 14.1x Tommy Hilfiger Claire's Stores Deb Shops Charlotte Russe Tommy Hilfiger Gymboree Barney's May Neiman Marcus Linens n Things Burlington Coat Factory Michaels Stores Barney's Recent M&A Activity in the Apparel Retail Sector 7 Selected M&A transactions for the last 2 years, Source: Capital IQ as of February 15, 2011. Apex Apollo Lee Equity Advent V. Heusen Bain Jones Federated Consortium Apollo Bain Consortium Istithmar 12/05 3/07 7/07 8/09 3/10 10/10 11/04 2/05 5/05 11/05 1/06 6/06 6/07 $1,547 $2,581 $259 $312 $3,136 $1,761 $400 $17,260 $4,981 $1,305 $1,958 $5,604 $942 Acquiror Date Announced Transaction Value Specialty Apparel Branded Specialty Apparel Median: 7.9x EV/ LTM EBITDA Branded Median: 8.9x Private Equity Buyer Strategic Buyer

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Retail discussion material

  • 1. Apparel Retail Discussion Materials Consumer Retail Group February 15, 2011
  • 2. Market Trends US Retail Industry Update Current market trends in Retail Industry: Pent-up demand, a rising stock market and incremental improvements in the overall economy led to a solid holiday season in 2010. The combined November/ December sales roses 4.1%, representing the best holiday comps since 2006 The level of consumer confidence is moving in two directions: with higher-income consumers spending again but still seeking value, and lower-income consumers remaining cautious on spending. Clothing sales were particularly strong, posting gains of 11.2% Apparel goods are likely to skyrocket due to increasing cotton prices and labor costs in China. The retailers will likely have no choice but to pass along increased costs to consumer, which would negatively impact unit volumes. 2 NAICS Code 4481 Adjusted Annual Sales for seasonal variations and holiday and trading-day differences, but not for price changes. Source: US Census as of February 15, 2011 http://www.census.gov/retail/mrts/historic_releases.html US Retail Industry Structure Internet Retail Discount Stores Department Chains Food Retail Restaurants & Food Services Catalog & Specialty Distribution Specialty Foods & Food Products Furniture & Furnishings Retailers Apparel & Footwear Manufacturers Footwear & Accessories Retailers $3,386 $3,467 $3,618 $3,841 $4,093 $4,313 $4,454 $4,409 $4,129 $4,398 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 US Retail Industry Annual Sales 2001-2010
  • 3. Market Trends US Apparel Retail Sector Overview 3 Current market trends in Apparel Retail Sector: Apparel sales were particularly strong during the 2010 holiday season, rising 11.2%, more than 10 times pace of the previous year. Consumers have been continuing to invest in trusted brands Rising cotton prices are expected to impact end consumer prices in 2011. While hesitant to raise prices in a difficult economic environment, both retailers and wholesalers appear to have recognized the need to take pricing action in order to limit margin declines The M&A sector has focused mainly on strategic buyers who continue to target opportunities to grow via acquisitions NAICS Code 4481 Adjusted Annual Sales for seasonal variations and holiday and trading-day differences, but not for price changes. Source: US Census as of February 15, 2011 http://www.census.gov/retail/mrts/historic_releases.html $119 $123 $128 $136 $145 $154 $162 $159 $152 $159 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 US Apparel Retail Sector Annual Sales 2001-2010 in Billion Work Casual Denim Going Out American Eagle American Eagle Abercrombie & Fitch Abercrombie & Fitch Urban Outfitters Urban Outfitters Forever 21 Forever 21 H&M H&M Express Express Express Express Guess Guess Bebe Bebe Gap Gap Banana Republic Banana Republic Banana Republic J. Crew J. Crew Teens Late 20s/ 30s + 20-30s Source: Company data, UBS EXPRESS Equity Research Report.
  • 4. Market Trends Apparel Retail Market Activity 4 Observations M&A activity in Apparel has been more than halved in 2010 compared to 2005. However, M&A activity in Apparel Retail sector is not expected to remain at current levels as we continue to see signs of a healthy backlog of transactions building in the space. Large strategic buyers continue to target opportunities to grow via acquisitions, as organic growth continues to face headwinds, given that consumers are cautiously increasing their spending. Source: Capital IQ* As of February 15, 2011 Source: Capital IQ* As of February 15, 2011 36 30 39 28 24 18 2005 2006 2007 2008 2009 2010 Apparel Retail M&A Activity Number of Transactions 8.6x 7.1x 7.4x 2.7x 5.3x 8.2x 2005 2006 2007 2008 2009 2010 Apparel Retail Multiples EV/EBITDA 3 6 2 2 3 7 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Apparel Retail Private Placements Number of Transactions Source: Capital IQ* As of February 15, 2011
  • 5. Market Trends Nov. 2010 Acquisition of J. Crew Group 5 Analyst Commentary The acquisition of J Crew would make a highly appealing LBO, as the core company concept maintains growth opportunities Its a great deal for J. Crew shareholders since estimated takeover value represents a 28% premium to stand-alone fair value estimates. There are not many ways to grow the firm other than aggressive cost cutting and expanding into bridal and mens segments, as well as the Madewell brand Leveraged Acquisition Loans Asset Based Credit Facility Investment Considerations J Crew is a leading retailer with multiple sales channel: 220 retail stores, 85 factory outlets, 20 Madewell stores and online venue The company made $1.7 billion sales in 2010 A top industry management team (Millard Drexler) that can deliver great results Acquiring the firm at an attractive price at $43.50 per share (52-wk high of $50.96 in April) (1) Premium to Octobers average stock price. (2) LTM on date of acquisition. has been acquired by Transaction Value: $3.0 Billion Offer Price/Share: $43.50 Premium: 24.6%(1) Cash Consideration: Equity (38.7%) Debt (61.3%) PF Ownership: TPG (75%) LGP (25%) 2010E EBITDA Multiple: 9.6x LTM(2) 's EBITDA Multiple: 8.6x Financing: Term Bridge Underlying: NA Sr Unsecured Notes Proceeds Raised: $1.2 Billion $400.0 Million Maturity: 1/26/2018 NA Feature: NA 1YR SC@101% Coupon: L + 350 L + 800 Price: 99.25% NA S&P Rating: B CCC Moody's Rating: B1 Caa1 Proceeds Raised: $ 250.0 Million Maturity: 2016 Coupon: L + 250 Acquirers took advantage of cheap debt and increasingly regard the stock market as good value J. Crew Group was acquired at its top performance stage as a result, this acquisition strategy depends on potential future growth rather than a simple management turnaround strategy
  • 6. Market Trends Recent M&A Activity in the Apparel Retail Sector 6 Source: Capital IQ as of February 15, 2011. Closed Date Acquiror Target Target Description Enterprise value EV/ EBITDA 11/23/10 (Announced) Leonard Green & Partners, L.P. and TPG Capital J. Crew Group, Inc. (NYSE:JCG) J.Crew Group, Inc. is a multi-brand, multi-channel, specialty retailer. The company offers an assortment of women's, men's and children's apparel and accessories. The company conducts its business through retail, factory, clearance, crewcuts, and Madewell stores, catalogs, and on its Website. $2,679.4 8.4x 1/4/11 LF USA Inc. Oxford Industries Inc., Substantially All of Oxford Apparel Business Oxford Apparel Business produces branded and private label dress shirts, suited separtes, sport shirts, casual slacks, outwear, sweaters, jeans, swimwear, westernwear, and golf apparel. $121.7 NA 11/17/10 Lodis Accessories, Inc. Another Line, Inc. Another Line, Inc. designs, manufactures, and sells belts, and hangbags for women, offering chain and beaded, fabric, and leather and woven style belts. The company was founded in 1988 and is based in Lake Forest, California. $6.8 NA 11/15/10 Signature Eyewear Inc. Rough Justice Rough Justice manufactures designer footwear for women. The company's products include platforms, wedges, dress footwear, sandals, and flats. The company was founded in 2007 and is based in Inglewood, California. NA NA 11/4/10 KarpReilly, LLC Adrianna Papell, LLC Adrianna Papell, LLC designs, sources, and distributes day and occasion dresses under the Adrianna Papell, Aidan Mattox, and Hailey Logan labels. NA NA 11/1/10 Hanesbrands Inc. (NYSE: HBI) GFSI Holdings Inc. GFSI Holdings, Inc., through its wholly owned subsidiary, GFSI, Inc., engages in designing, manufacturing, and marketing sportswear and active wear bearing names, logos, and insignias. $225.0 7.5x 10/28/10 (Announced) Charles Komar & Sons, Inc. Carole Hochman Design Group, Inc. Carole Hochman Design Group, Inc. designs and manufactures sleepwear, loungewear, and daywear for women. The company was founded in 1930 and is based in New York, New York. NA NA Selected M&A Transactions for the Last 2 Years
  • 7. Market Trends 7.9x 7.9x 7.8x 6.6x 7.9x 8.2x 8.1x 8.9x 10.2x 8.8x 7.2x 12.2x 14.1x Tommy Hilfiger Claire's Stores Deb Shops Charlotte Russe Tommy Hilfiger Gymboree Barney's May Neiman Marcus Linens n Things Burlington Coat Factory Michaels Stores Barney's Recent M&A Activity in the Apparel Retail Sector 7 Selected M&A transactions for the last 2 years, Source: Capital IQ as of February 15, 2011. Apex Apollo Lee Equity Advent V. Heusen Bain Jones Federated Consortium Apollo Bain Consortium Istithmar 12/05 3/07 7/07 8/09 3/10 10/10 11/04 2/05 5/05 11/05 1/06 6/06 6/07 $1,547 $2,581 $259 $312 $3,136 $1,761 $400 $17,260 $4,981 $1,305 $1,958 $5,604 $942 Acquiror Date Announced Transaction Value Specialty Apparel Branded Specialty Apparel Median: 7.9x EV/ LTM EBITDA Branded Median: 8.9x Private Equity Buyer Strategic Buyer