Mergers, Acquisitions and Bankruptcies: What’s in the Cards for the apparel and Retail Sectors


As of Thursday, September 29, 2016

Nobody would disagree that it has been a challenging year for clothing manufacturers and the retailers they supply.

Shoppers are flocking to online sites to snap up purchases while spending more money on dining out and traveling. This has left tried-and-true retailers and manufacturers in a quandary.

Recently, Delta Galil bought three Los Angeles labels—7 For All Mankind, Splendid and Ella Moss—from VF Corp., which had seen revenues from those three contemporary brands shrink over the last few years.

At the same time, a number of retailers and manufacturers have resorted to declaring bankruptcy as consumers shift their shopping patterns and tastes. Orange County, Calif.–based surfwear and skatewear retailer Quiksilver recently emerged from bankruptcy by restructuring its $800 million debt and whittling down its retail landscape.

We caught up with several finance-industry executives to talk about the merger-and-acquisition scene and whether more bankruptcies are on the horizon.

Recently, several Los Angeles apparel companies have been sold or are up for sale while major surfwear manufacturers/retailers have emerged from bankruptcy. What does the M&A and bankruptcy landscape look like for the rest of the year and why?


Mark Bienstock, Managing Director, Express Trade Capital

Mark Bienstock, Managing Director, Express Trade Capital

Apparel has historically been a very unattractive industry for takeovers and for good reason. Hedge funds and other buyout vehicles are interested in growth industries such as technology, life sciences, etc., that have a good underlying story to tell.

Apparel has very little growth prospects with the number of retailers that continue to close down. Generally, in the apparel business, sellers feel the company is worth much more than the equity on the balance sheet dictates.

It is a fact that the real value of most apparel companies is the talent of the key personnel and properly valuing that intangible is extremely difficult, making mergers a very unlikely outcome.


Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal

Sydnee Breuer, Executive Vice President, Rosenthal & Rosenthal

The retail landscape continues to remain extremely difficult with bricks-and-mortar stores’ sales lagging, resulting in downward pressure on margins and the bottom line.

I believe we are going to see an increase in retail bankruptcies, store closings and liquidating businesses. This will obviously have a negative effect on the manufacturers and importers who supply the retailers, who will also experience a downturn in revenue, further exacerbating what is already a very challenging environment for them.

They will have limited options facing them. They may choose to close/liquidate or file for bankruptcy. Another alternative, however, would be to go through the mergers-and-acquisitions process, perhaps before the situation becomes so dire.

This may allow the manufacturer/importer to combine forces with a complementary or similar business to improve the sales and most likely streamline the operating expenses by taking advantage of economies of scale. M&A to a private-equity firm affords the manufacturer/importer professional management and perhaps turnaround experience to assist with hopefully returning the company to profitability.

Additionally, private-equity firms continue to raise funds and need to find acquisitions to invest in.

So, yes, the M&A activity will continue throughout the rest of the year and for the foreseeable future.


Gino Clark, Senior Vice President, Portfolio Manager, Western Region Capital Business Credit

Gino Clark, Senior Vice President, Portfolio Manager, Western Region Capital Business Credit

As the retail model continues to rapidly shift and expansion plans wane, so do the balance sheets of major retailers.

Combine this with a very polarizing presidential election, the Federal Reserve teasing interest rate increases off and on this year, and overall uncertain global economic landscape, this year has been anything but normal for the retail sector.

At Capital Business Credit, we continue to see a lot of volatility, particularly in the juniors apparel market, and wouldn’t rule out seeing more bankruptcy activity this year or early into the first quarter of 2017 after holiday sales are tallied.

This volatility requires us to be extremely nimble when working with these retailers as things can shift dramatically within a single season.

When it comes to M&A activity for the remainder of the year, we believe investors are hunting for value and opportunistic buys over premium buys. We don’t expect to see any more acquisitions like the purchase of by Walmart but rather expect to see private equity and/or Asian investors looking to snatch up good deals from potentially struggling brands.

Rob Greenspan, President and Chief Executive, Greenspan Consult Inc.

My clients and I are always watching and talking about the mergers-and-acquisitions market, as that is a strategic option for many of my clients.

The M&A market is still seeking viable, profitable and branded companies that can continue to grow and prosper. From my point of view, in the M&A market, there are still large amounts of money/cash available to purchase apparel companies.

The potential buyers are out there, but they have to be won over by the seller. The buyers seem to be more selective now, taking their time to review and analyze the prospective sellers. And with business conditions as they are, along with all of the consolidation over the past years, there appears to be fewer qualified sellers now than before.

Concerning the bankruptcy landscape, with poor retail conditions working against apparel manufacturers, no one should be surprised to see more business closures during the next 12 months.

Retail orders seem to be down overall as compared to 2015 and market conditions don’t seem to be improving. This includes retailers as well.

Credit terms to retailers are tightening with some retail credit lines being eliminated completely.

Unfortunately, this will continue to sort itself out and the weakest will not survive.


Sunnie S. Kim, President and Chief Executive Officer, Hana Financial

Sunnie Kim, President and Chief Executive, Hana Financial

Bankruptcies are generally a function of the overall financial climate. Therefore, these trends seem to be cyclical.

Unfortunately, the last 18 to 24 months have been extremely tough for apparel retailers as manifested by some very high-profile bankruptcies.

Is this current cycle over? I think it may depend largely on the upcoming elections. Whoever is the victor, their economic policies will have a tremendous impact on the apparel industry—especially through trade policies and tariffs.

I do think that more mergers-and-acquisitions activity is on the horizon, specifically by private-equity firms. The trend appears to be up as 2015 saw 93 acquisitions compared to 81 in 2014, according to Meridian Capital.

Although there still remains some uncertainty with respect to interest rates and other Fed policies, many private-equity firms are sitting on considerable cash reserves and are looking for solid investments at reasonable premiums—especially while interest rates remain relatively low, supporting debt-financing options.


Louis Mastrianni, Managing Director and Head of Apparel Commercial Banking, JPMorgan Chase & Co.

Louis Mastrianni, Managing Director and Head of Apparel Commercial Banking, JP Morgan Chase & Co.

There continues to be interest in the apparel space on the acquisition front from both strategic and financial buyers.

Branded businesses, even the ones that may have lost market share, are seeing opportunities.

Financing markets remain in good shape, and the economy is faring well, which seems to have more people window shopping for opportunities.


Robert Meyers,Chief Commercial Officer, Republic Business Credit

Robert Myers, Chief Commercial Officer, Republic Business Credit

Stories surface weekly around various retail struggles throughout the country, whether it’s Macy’s, Ralph Lauren, Aéropostale, Chico’s, Sears or the liquidation of Sports Authority. Even successful retailers such as Walmart and Walgreens are scheduled to close more than 100 stores in 2016.

As future retail uncertainty remains, it will put greater pressure on traditional measurements when assessing value for M&A transactions. M&A valuations balance the cost of capital to run the business combined with future financial performance. As future cash flows become harder to predict, borrowing costs will increase and apparel-related firms will have fewer selling opportunities.

With retailers showing mixed results, manufacturers will experience decreased M&A activity for the remainder of 2016 and the first half of 2017.

Retailers are highly leveraged, forced to issue higher yielding bonds to maintain more-expensive working capital to evolve their struggling businesses. The greater borrowing rates do increase the likelihood of bankruptcy.

Despite several manufacturers and retailers emerging from bankruptcy in 2016, there are several more that will file as their debt obligations become due in the upcoming years.

While leverage isn’t always an indicator of bankruptcy, increased distress and potential recessionary concerns will see additional bankruptcies. It is essential that apparel manufacturers and distributors work with their lenders to check the default and slow-payment risk of their retail customers. This is routinely offered by factoring and asset-based lenders.


Dave Reza, Senior Vice President, Milberg Factors

Dave Reza, Senior Vice President, Western Region, Milberg Factors

The environment in the apparel sector as a whole continues to be a challenging one for retailers, manufacturers and importers alike.

With few exceptions, retailers are reporting declining year-over-year operating results as consumers spend disposable income elsewhere. In addition, retailers are struggling to keep up with the pace of the transition from retail to online sales.
Given these dynamics, it would not be a surprise to see some high-profile bankruptcies in the coming months. Case in point, vis-à-vis action sports, we have already seen the liquidation of two leading retailers—Sports Authority and Sport Chalet—along with the bankruptcy filing of retailer PacSun.

Ironically, there is still liquidity in the private-equity market, so investors are still looking for opportunities. With interest rates probably going up after the presidential election, there may be opportunities for both buyers and sellers to consummate deals despite the poor retail outlook.

The challenge before the M&A community is whether they are truly acquiring a “brand” with strategic impetus or if they are merely creating a liquidity event for a “label” and its principals.


Ken Wengrod, President, FTC Commercial Corp.

Ken Wengrod, President, FTC Commercial Corp.

As I predicted last year, I still foresee more consolidation in our industry. The larger retail players have been working on small margins with high debt, and they are rapidly losing their market shares. Consequently, those manufacturers with high-sales concentrations that have been selling to these large retailers share the same burden and the damages.

They have a higher chance of either self-liquidating or eventually filing for a bankruptcy because they were surviving only on a prayer. The leadership within these enterprises was only driven by short-term goals and failed to build a brand with a strong financial base and a strong consumer loyalty.
Right now, it’s all about cash. The companies (domestically and internationally) that successfully saved and accumulated cash have the power to drive the mergers-and-acquisitions markets in 2016, beyond what happened in 2015.

Previously, the focus on M&A was to cut the cost and to maximize profits, but today the nontraditional power buyers are being disruptive innovators by using new technology such as data mining and by finding ways to acquire strong consumer loyalty.
The purpose of M&A has shifted to maximize customer networks and diversify platforms.

The economic atmosphere of a low-interest rate is driving these power buyers to buy out companies that have already created a strong consumer relationship.

The turmoil in the recent international markets and the divergence in economic and monetary policies will also push up the demand for M&A in the near future.

I noticed that there is a tremendous growth of nano-fabrics and a strong demand for athletic, leisure and outdoor wear by consumers. I believe that the power buyers will be looking to acquire these new companies, which would complement and expand their existing product lines.


Paul Zaffaroni, Managing Director, Roth Capital Partners

Paul Zaffaroni, Managing Director Roth Capital Partners

Retail apparel M&A and bankruptcies will continue in the fourth quarter of 2016 as clothing makers adjust to a rapidly changing landscape, where consumers are increasing their spending online and allocating more of their budget to experiences, including dining out, travel and fitness.

Mall-based retailers are not going away, but many will need to rationalize their store base given the decline in mall foot traffic. Aéropostale recently emerged from bankruptcy under a unique structure and ownership group that includes Authentic Brands Group, Simon Property Group, General Growth Properties, Gordon Brothers Retail Partners and Hilco Merchant Resources.

The new Aéropostale will have a smaller store count of more than 200 stores (instead of more than 800 stores) but will have an increased focus on e-commerce and licensing, leveraging the expertise of brand-management firm Authentic Brands.

I expect to see a similar outcome with American Apparel with the ultimate buyer closing a significant number of stores and working with a brand-management firm to unlock brand value through a licensing program and expansion of e-commerce.

Direct-to-consumer brands that sell through the Internet, catalog or their own retail stores are one of the bright spots today in retail apparel M&A. Private-equity buyers are interested in this category given the “capital light” nature of these businesses and how quickly they can “scale” with the right digital strategy.