By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
2013 was an active year for apparel retail M&A transactions. rue21 was acquired by private equity group Apax Partners; True Religion Apparel, Inc. (NASDAQ:TRLG) was acquired by private equity firm TowerBrook Capital Partners; The Jones Group Inc. (NYSE:JNY) announced recently that it will be acquired by private equity firm Sycamore Partners which focuses on retail investments. Sycamore also acquired an 8% stake in teen retailer Aeropostale Inc (NYSE:ARO).
In a September 2013 SEC filing, the private equity firm said it believes the shares to be an attractive investment and may discuss with company’s management, board of directors, and other shareholders company’s plans and strategy. Hanesbrands Inc. (NYSE:HBI) acquired underwear maker Maidenform Brands, Inc. (NYSE:MFB), and of course the still ongoing takeover battle between Jos. A. Bank Clothiers Inc (NASDAQ:JOSB) and The Men's Wearhouse, Inc. (NYSE:MW). Despite outperformance of the sector versus the S&P 500 (INDEXSP:.INX) if judged by SPDR S&P Retail (ETF) (NYSEARCA:XRT), retail is considered by many to be in a weak state due to decreasing consumer spending. Such a tremendous M&A activity makes one wonder if there is any remaining value out there.
Another important trend that characterized equity markets over the last two years was the rise of shareholder activist efforts. Targets you probably heard about are Apple Inc. (NASDAQ:AAPL) with Carl Icahn dining recently with company’s CEO Tim Cook and pressing for an increase of the buyback program, Daniel Loeb of Third Point pushing for corporate changes at Sothebys (NYSE:BID) and Sony Corporation (NYSE:SNE) (TYO:6758), Bill Ackman and his huge position in struggling retailer J.C. Penney Company, Inc. (NYSE:JCP) which did not work out so well or could even be considered a total disaster as an investment, Jana Partners' position in grocery operator Safeway Inc. (NYSE:SWY) which recently adopted a “poison pill” that blocks an investor from acquiring more than 10% of shares...the list goes on.
One of the most successful activist investments recently, in my view, was a high-profile activist campaign at Yahoo! Inc. (NASDAQ:YHOO) by Daniel Loeb of Third Point. Since the disclosure of his stake back in September 2011, the stock price had risen 180% - in a period of about two years only. A few factors contributed to such great performance: “standalone” Yahoo was valued at a conservative price; significant restructuring and business improvement opportunities existed, and aggressive activist campaign helped to enact reforms. However, two important additional stars were shining bright: a weakening of the Yen in 2012-2013 contributed to a significant rise in Japanese equities and Yahoo! Inc. (NASDAQ:YHOO) Japan, while more clarity started to appear regarding the increasingly valuable Alibaba stake.
It seems that a few bright starts are also aligning for Chico’s FAS, Inc. (NYSE:CHS). Chico’s is a specialty retailer of women’s private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other items. The company operates through Chico's FAS, Inc. (NYSE:CHS), White House Black Market, Soma Intimates and Boston Proper brand names. On the valuation side, Chico’s trades at an EV/EBITDA multiple of x6.8 (2012), has no debt, and recently increased its dividend, which after increase represents a 1.6% annual yield.
The company is also actively returning capital to shareholders: it executed a $125 million share buyback in the last quarter, and approved a new $300 million share repurchase authorization. In September 2013, Blue Harbour Group disclosed a 5.6% stake in the company. Blue Harbour is known for its activist investments, while working in a collaborative and supportive manner with companies and management (as opposed to more “active” activist investors who might engage in proxy fights, etc.). Clifton Robbins, CEO of Blue Harbour Group called Chico's FAS, Inc. (NYSE:CHS) a “growth stock being valued as a value stock”. Based on media reports, Chico’s is also seen as a potential buyout candidate because it has no debt and provides attractive growth prospects. Recent M&A wave in the apparel retail sector clearly makes this a reasonably probable scenario. So far, all stars are aligned for Chico's FAS, Inc. (NYSE:CHS).