Barneys Sold

Source: just-style.com




Jones Apparel Group Inc on Thursday said it is buying Barneys New York Inc for $400 million.

As part of the purchase New York-based Jones Apparel will pay $294.3 million in cash for Barneys stock, equating to a price of $19 per share.

In addition, Barneys will conduct a tender offer for $106 million of senior secured notes due 2008, with Jones Apparel supplying the funds to be paid out in the offer.

Luxury fashion and accessories retailer Barneys operates stores in 21 locations and generated net sales of $444.2 million and operating income of $32.8 million for the twelve months ended 31 July 2004.

Howard Socol, Barneys' chairman, president and chief executive officer, will continue to head the company and lead its current expansion drive.

Peter Boneparth, president and chief executive officer, Jones Apparel Group, said: "We are excited about bringing this famous brand into our portfolio."

He added that the Barneys acquisition will complement the company's existing retail mix which includes brands such as Jones New York, Evan-Picone, Gloria Vanderbilt, Nine West, and Anne Klein.

"Barneys provides the next level of diversification by introducing a new competency in luxury specialty retailing. With an inherent diversified portfolio comprised of its own brand, as well as numerous other brands from new designers and classic design houses, Barneys provides entry into the high-growth, resilient luxury goods market."

Retail will now comprise 24 per cent (up from 17 per cent) of Jones Apparel's projected 2005 net revenues. Revenues distributed through the specialty retail channel will now compose 28 per cent (up from 21 per cent).

Doesn't surprise me. As a freestanding chain, Barneys has been plagued with problems, and I think has been chronically close to bankruptcy, even after 1997, when it went into receivership. I could see it doing well under the Aegis of Jones, and it could be a good move for Jones. Barneys has a great reputation already (although since its expansion, it has lost some of its cachet, and now seems more a slightly more upscale, edgier Saks than it does Louis Boston) and if its expansion plans (including a new location *and* menswear in Boston, thank you) are successful, Jones will have a nice little finger in the luxury market pie.

I think this is a horrible mistake for Jones where they have paid too dearly a price. Barney clearly doesn't generate the cash flow to justify the price Jones paid. I wouldn't be surprised if this ends up like Mark & Spencer selling off Brooks Brothers for a loss.

This might have made more sense if Jones could generate savings by using its buying power to negotiate better prices for Barney's. But, I don't expect much overlap between the two to occur. Do you really think that the same manufacturer that produces all the house labels for Barney to be the same manufacturer that makes all those NY Jones suits you see in the mall?

Nor does this give Jones other labels a halo effect where the consumer associates it with Barney, and therefore assume it to be higher quality. I don't think the average consumer will know the same company that ownes Jones NY is also the same owner of Barney's.

THe only way Jones can get a return on this investment would be to aggresively open more stores and outlets. However, this runs the risks of further diluting the cachet and exclusivity of Barney's reputation. This is what MS tried to do with BB, and it failed miserably.

Well just on a financial basis, without taking a detailed look at the books of either company, paying $400M for a company making $32M per year isn't a bad deal at the current cost of capital. Obviously Jones thinks they can run Barneys tighter and generate a higher degree of profitability from the company, yielding ROI > 8%.

The key to this transaction is that Jones has the capital to expand Barneys. They want to have flagships in the major cities and coop stores in smaller cities and multiple coops in large cities. NYC and Chicago are their test cases, and the coops have been very successful. Look for expansion in Boston, Miami, Chicago, Vegas, etc.

I think they realize that if they dumb-down the merchandise, they'll lose their customer base. However, Barneys merchandise already varies greatly by store (as does merchandise among Saks and NM stores).

If Barney expands their number of stores, this will create a greater buying power to negotiate better savings on prices so it really doesn't matter if there's overlap with Jones corporation.

And, I don't know if Brooks Brothers problems can be directly attibuted to overexpansion. Instead, I think the real problems was the phenomenon of business casual and its aging customer base. Trying to make a profit with this base is like squeezing blood from a turnip- they're thrifty, i.e. cheap and stingy. They demand Brooks to be highest in quality, made in America, and yet still expect it to not be expensive. And, they don't even buy that much since they expect to wear a oxford shirt forever. To address these two issues, Brooks Brothers tried to expand its customer base. However, the execution was terrible- they ended up driving their loyal customers to places like J. Press and was not able to effictively reach out to younger customers willing to spend.

With having said all that, why would Barney's get sold for 400M while Brooks Brothers was sold for about half that a few years ago? I mean Brooks Brothers has more history, and generates more sales. If you're going to run a tigher ship, wouldn't you get more out of a store with more transactions than one with fewer. The only reason I can see why Barney's has a higher market value is just because of its potential for growth compared to Brooks Brothers.

I think you've touched on one area, which is potential for growth, the other areas of consideration are how much investment it will take to right the ship, and of course, what the ROI is. Right off the bat, Barneys will return 8% on your investment with no changes... that's not a bad situation to be in on paper.

I'm sure we can all agree that the deal only makes financial sense if Jones aggresively markets and expands Barneys.

However, I have a few issues with a possible overexpansion, if Jones is not careful.

First of all, Barneys is able to charge a premium because of the exclusivity of its apparel; you find certain brands only at Barneys and not at other places. I wonder if their current sources could keep up with the increased demand of expansion. If not, Barneys will have to turn to the same sources as every other luxury retailer. If Barneys becomes just another luxury retailer, then it will lose its ability to charge its premiums anymore. They might end up sacrificing profits for growth. Too often in these kinds of deals, you see the companies growing without profit to justify the purchase price.

And, then there's the issue of how many other places can Barneys expand to. All the logical sites- NYC, LA, etc., already have one or are in the process of setting up there. Once, you build one in Chicago, Miami, Las Vegas, how many other places have the population that can support a store? And, we're not just talking about population density either. Would a Barneys really translate that well in a place like Cleavland?

Actually, there's already a Barney's in Chicago, at the corner of Oak and Rush.

I've long argued that overexpansion is the surest way to destroy a luxury brand. Then again, maybe I'm high. IMO, Louis Vuitton is the poster child for taking what was once an exclusive brand and turning it into something accessible to the masses. This appears to have meant only profits for them and the backlash has yet to occur. If the true top end shoppers no longer view them as exclusive, I'm sure they are sleeping well at night with their millions raked in from new middle class buyers.

I think that the Barney's Co-ops are where they will be aggressively expanding. First, the merchandise is lower priced and caters to a younger clientele with money to spend and the inclination to do so. Second, there are not many freestanding Co-op stores, (I think that these exist *only* in NYC at the moment) and much of the expansion (including that planned for Boston) is to separate the Co-op from the main store (although I imagine that some things from the Co-op will still be available - jeans, for example, are bread and butter.) Third, it is considerably easier to maintain cachet in "streetwear" than in other areas. Every high end store has the usual bevy of luxury specialists (Avon Celli, Malo, etc...) high end men's tailored clothing and shirting (From Isaia and Kiton (increasingly common), to Zegna, down to Vestimenta), and the designer bunch. On the other hand, with a dedicated team of buyers that only a Barneys can assemble, there is nearly an endless supply of new and interesting but sellable streetwear.