Why is anyone still buying retailers from private equity firms?
On March 9, 2017, private equity firm TowerBrook, the owner of women’s clothing retailer J. Jill, dumped half of its stake via an IPO at a price of $13 a share into the lap of the unsuspecting public, during a time when brick-and-mortar retailers that are owned by private equity firms are heading into bankruptcy court, one after the other.
By Wednesday at close, shares of J. Jill had dropped to just over $10. And then after-hours and today during regular trading, they plunged another 51% to $4.86!
Why are investors still buying brick-and-mortar retailers – or anything – from PE firms? No one knows. But inexplicably, it’s still happening.
By 8:31 PM on Wednesday, shareholder rights law firm Johnson Fistel announced that it is “investigating potential violations of the federal securities laws by J.Jill Inc. … and certain of its officers and directors.” It added, that the investigation “seeks to determine whether certain statements regarding J.Jill’s business and prospects were false and misleading when made.” Other class-action law firms will follow.
But at the time of the IPO, Fortune gushed:
Founded in 1959, J. Jill is a women’s apparel brand that focuses on customers between the ages of 40 to 65 and relies heavily on catalog- and web-driven sales, which generate 43% of total revenue with the rest relying on brick-and-mortar retail. The company’s strong direct-to-consumer model is linked to J. Jill’s heritage as a catalog company and it circulated 57 million copies of catalogs in 2015 alone. J. Jill contends that those direct channel relationships can also fuel sales at the company’s 275 stores.
Net sales totaled $617 million for the 12-month period ended October 29, up from $432 million in 2012.
J. Jill CEO Paula Bennett told Fortune: “There is a lot of negative sentiment about the apparel sector and a lot of talk about the industry headwinds. The headwinds facing many of our peers are tailwinds to us. We see ourselves as a model that others aspire to be.”
That “model” came home to roost on late Wednesday with a hefty dose of post-IPO reality — a profit warning. CEO Bennett explains:
“We have experienced a lower than expected sales trend across both our retail and direct channels, and are updating our guidance for the quarter. We have been assessing the change in trend and have identified product and marketing calendar issues that are affecting traffic and conversion, and we are reacting quickly.”
So she blamed “product and calendar issues” for a juicy same-store sales decline of 3% to 5% in the third quarter. She also slashed the earnings outlook.
J. Jill has a colorful ownership history. It went public in 1993. In 2006, Talbots acquired it for $517 million but in 2009, during the Financial Crisis, sold the outfit for $75 million to PE firm Golden Gate Capital, which later sold a majority stake to Bahrain-based Arcapita at a price rumored to have been four times its investment. In March 2015, TowerBrook Capital Partners L.P. acquired J. Jill for an undisclosed amount that was rumored to be $400 million.
When it announced the acquisition, TowerBrook said along with the usual hype (emphasis added):
TowerBrook has deep expertise and a strong network in the consumer and retail space, working with companies such as Jimmy Choo, True Religion, Kaporal and Phase Eight….
That was in March 2015. But True Religion, a denim designer and retailer with 1,900 employees, was one that TowerBrook couldn’t dump in time into the lap of the public. In July, 2017, four years after its leveraged buyout and now saddled with $535 million in debt, True Religion filed for bankruptcy.
During the IPO in March 2017, J. Jill received no proceeds. Everything went to TowerBrook, which sold 13.416 million shares, including the overallotment. At $13, its take was $174 million.
On April 4, 2017, a related entity, Towerbrook Investors, Ltd., which owned 10% of J. Jill, sold 865,000 common shares in the open market at an average price of $12.09, for $10.46 million. The public float is now 14.15 million shares. As of September 29, the short-interest was a humongous 18.8% of that float. So some folks made some money today as this PE-firm hobbled retailer, one in so many, is getting pulled into the brick-and-mortar meltdown.
And there’s no end in sight. The latest casualty is Sears Canada. It’s going to liquidate, close all stores, and lay off 12,000 people. Read… It’s Over for Sears Canada.
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