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) was acquired by private equity firm Sycamore Partners which focuses on retail investments. And of course the takeover battle between Jos. A. Bank Clothiers Inc (NASDAQ:JOSB) and The Men’s Wearhouse, Inc. (NYSE:MW), which ended with Men’s Wearhouse acquiring Jos. A. Bank. We decided to take a look and see if there is still some value out there. Below are few interesting value investment ideas in the retail sector:
Retail stock ideas: ANN Inc
Activist investors Engine Capital and Red Alder LLC recently acquired a 1% stake in the company and sent a letter to company’s board of directors with demands to consider strategic alternatives. Possible alternatives include, among other options, recapitalization and sale to private equity or strategic buyer. Ann Inc (NYSE:ANN) is a leading national specialty retailer of women’s apparel, shoes and accessories. ANN Inc is the parent company of Ann Taylor and LOFT, two of the leading women’s specialty retail fashion brands in North America. In March 2014, Golden Gate Capital, a private equity firm based in San Francisco, disclosed a 9.5% stake in the company. ANN Inc has a market capitalization of $1.88 billion and is currently valued at an EV/EBITDA multiple of x6.3 (based on last full fiscal year results). One of the main benefits of ANN Inc’s shares is a lack of debt, which provides the company an extra financial flexibility. The day after disclosure of activist investors’ demands it was reported by Reuters that company has hired JP Morgan to help it evaluate strategic options, which can include a sale of the retailer.
Retail stock ideas: Chico’s FAS, Inc.
Chico’s FAS, Inc. (NYSE:CHS) 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, White House Black Market, Soma Intimates and Boston Proper brand names. According to a quarterly holdings report filed with the SEC, Blue Harbour Group recently increased its holding and currently owns a 6.9% stake in the company. It is also one of the fund’s largest positions (6.9% weight in the portfolio). Blue Harbour Group 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 a growth stock being valued as a value stock. Based on media reports, Chico’s FAS is also seen as a potential buyout candidate because it has no debt and provides attractive growth prospects. On the valuation side, Chico’s FAS has a market capitalization of $2.38 billion, has no debt, and is currently valued at an EV/EBITDA multiple of x6.6 (based on last full fiscal year results). Company also pays a regular quarterly dividend which currently provides an annual dividend yield of 1.9%.
Retail stock ideas: Guess?, Inc.
Guess?, Inc. (NYSE:GES) designs, markets,distributes and licenses one of the world’s leading lifestyle collections of contemporary apparel and accessories for men, women and children that reflect the American lifestyle and European fashion sensibilities. Company also selectively grant licenses to manufacture and distribute a broad range of products that complement its apparel lines, including eyewear, watches, handbags, footwear, kids’ and infants’ apparel, outerwear, swimwear, fragrance, jewelry and other fashion accessories. Guess Inc’s products are sold through direct-to-consumer, wholesale and licensing distribution channels. Based on the recent share price, Guess Inc has a market capitalization of $2.2 billion, and similarly to previous two companies, has no debt. Company has a large cash holding of $471 million, which equals 21% of its equity market value. Guess Inc currently trades at an EV/EBITDA valuation multiple of x5.6 (based on last full fiscal year results), while free cash flow yield equals 11.5%. Company also pays a regular quarterly dividend and the annual dividend yield is 3.5%.
Retail stock ideas: The Men’s Wearhouse, Inc.
Last year, The Men’s Wearhouse, Inc. (NYSE:MW) turned tables on Jos. A. Bank Clothiers Inc (NASDAQ:JOSB), and agreed to acquire it for $65 per share in cash or $1.8 billion in equity value. In June 2014, Men’s Wearhouse completed transaction. It is interesting to note, that as of June 30th, 2014, few hedge funds own stakes in the retailer. Among them is Eminence Capital, which, during last year’s battle between companies, acquired http://www.valuewalk.com/2014/01/jos-bank-mens-wearhouse-leave-investors-puzzled a 9.8% stake in Men’s Wearhouse along with a smaller holding in Jos. A. Bank Clothiers Inc. The fund had attempted to persuade Men’s Wearhouse to enter negotiations in order to be acquired by Jos. A. Bank Clothiers Inc. (as originally proposed). Other funds are York Capital Management with a 3.7% stake, Tiger Consumer Management with 3.7%, and Oz Management (Och-Ziff Capital Management), again with a 3.7% holding. Collectively, the four funds control 21% of company’s shares. Men’s Wearhouse has a market capitalization of $2.64 billion. Based onboth companies’ combined last full fiscal year results, and assuming a midpoint estimate ($125 million) of the projected synergies to be achieved by 2016, the “new” company is currently valued at an EV/EBITDA ratio of x7.7.
Retail stock ideas: Macy’s, Inc.
Macy’s, Inc. (NYSE:M) is one of the nation’s premier omnichannel retailers, with fiscal 2013 sales of $27.9 billion. The company operates the Macy’s and Bloomingdale’s brands with about 840 stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names of Macy’s and Bloomingdale’s, the macys.com and bloomingdales.com websites, and 13 Bloomingdale’s outlet stores. Macy’s Inc has a market capitalization of $22.13 billion, a conservative amount of debt, and is currently valued at an EV/EBITDA multiple of x7.4 (based on last full fiscal year results), while free cash flow yield is 7.6%. Company pays a regular quarterly dividend and the annual dividend yield is 2%. Company also allocates a meaningful amount of capital to share repurchases, and over the last two years it repurchased $2.4 billion worth of stock.