Retail M&A hasn’t exactly been humming along of late, and the jury’s still out on just how much the consumer downturn affected businesses bought before and during the recession. We sat down with Sun Capital, one of the more prolific retail investors, and talked to Vice President Jeff Magny about how the firm handled its investment in Gordmans Inc., an off-price retailer it bought in September 2008. The firm has since taken it public – in 2010 – and it took more money off the table in a May secondary offering that saw its stake fall from around 69% to roughly 53.4%.
PE Beat: So, Sun invested in Gordmans in late 2008, which wasn’t exactly the best time to be getting into retail, as we all found out just a few short months later. What was the thesis there – and did you anticipate what was to come?
Jeff Magny: When we first looked at the company, it was mid-2008. Things weren’t that bad; the economy hadn’t fallen off the cliff just yet. At the time, we thought Gordmans had a scalable business model, and when we did interim negotiations, around August, the crisis at that point didn’t alter our view. As it relates to our thesis, it was improving margins through technology and focusing on underperforming stores.
About that – what did you do with the company during your ownership?
Part of the thesis was centered around technology, and one of the things we rolled out with the management team was a markdown optimization tool. The old system didn’t have a strategic approach to pricing. An orange sweater that was a best seller in Omaha was at full price in Oklahoma City, where it wasn’t selling as well. This tool allowed for a more sophisticated approach to pricing. Now, in that Oklahoma City store, the sweater will be marked down to make room for more inventory.
We also added new brands like Hurley, PGA Tour, Puma and Chaps. We lowered freight costs and repositioned ad spend. Gordmans spent a lot just on print and TV ads. We assessed how much incremental sales they were getting per ad dollar, and scaled it back. We also switched up management at underperforming stores to improve operations.
Being in the midst of a recession, were there any panic moments?
We generally don’t panic here. But I will say that from a liquidity standpoint, it worried us a little as we didn’t know how bad things in the broader economy would get. Also, when we invested, developers were investing 100% of capital costs for new stores, and we did have concerns around how much support they would continue to extend to the company through the downturn. Growth was a big part of the plan, and we certainly needed to due diligence around that.
How did the downturn affect store comps?
Up until we bought the business, comps were good. Two-thousand-eight was the first time in the last few years Gordmans actually experienced negative comp store sales. For the first few months we owned it, comps weren’t tracking as well. Into 2009, they improved. We paid close attention to the cost base, because our expectation was that things were going to get worse. Turns out people traded down a lot sooner than we expected.
Gordmans’ IPO priced at $11 a share, below the expected range of $13 to $15. How did Sun react to that?
It was a difficult market, August 2010. While we priced slightly low, we were happy overall with the result.
WSJ.com – Private Equity Beat blog