Three Signs That 2023 Could Be a Busy Year for M&A After All
2023 was shaping up to be a quiet year for mergers and acquisitions in the U.S. retail industry, thanks to volatility and uncertainty in the equity and debt markets. But three big headlines this week might signal a shift in the mood.
In 2022, rising interest rates contributed to a weaker dealmaking environment. To help curb spending and price inflation in the U.S., the Federal Reserve implemented a series of rate hikes, culminating in another half percentage point rise in December that marked the highest level in 15 years. In addition to making debt-based deals more expensive, those actions also raised serious concern among business leaders of an economic recession in the U.S. this year.
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Their fears may be unfounded, though, according to the National Retail Foundation. In his monthly economic review, NRF chief economist Jack Kleinhenz wrote that the economy appears more resilient than anticipated and he does not expect an official recession.
But consumers are still feeling the pinch of higher prices by cutting back on discretionary spending, as seen in the latest round of earnings reports. Many major footwear brands and retailers have reported sales declines, which have been exacerbated by excess inventory left over from 2022’s supply chain mess.
Facing those serious challenges, company leaders are looking for ways to improve profitability — and divesting assets, such as brands and property, is one of the quickest ways to turn a balance sheet red to black.
According to a report from global consulting firm Bain, retail companies will likely turn to M&A activity for growth in 2023, as sales slow down and they look to expand their reach.
At the same time, companies in healthier positions are seizing the opportunity to scoop up and reinvigorate these assets.
Here were three big deals announced just this week that suggest a fertile ground for M&A activity this year.
Designer Brands Buys Keds from Wolverine
On Wednesday, Designer Brands Inc. announced that it had snapped up Keds from Wolverine Worldwide Inc. The news came just two months after WWW revealed its plan to offload the 107-year-old sneaker label via an acquisition or licensing deal.
As part of this new agreement, DBI (the parent company of DSW and Camuto Group) will acquire all Keds products, including the Pro-Keds sneaker line, plus the brand’s e-commerce business. Prior to the deal, DSW was Keds’ largest wholesale customer. At the same time, DBI also picked up the global license for Hush Puppies, after previously having an exclusive wholesale deal with the brand for DSW.
Though terms of the deal were not disclosed, Wolverine confirmed via a statement that the deals generated $90 million in cash for the company.
This could be just the beginning for Wolverine, which said in December that it was also in the process of divesting its Wolverine Leathers business. And in a note to investors this week, analyst Jim Duffy at Stifel suggested the multibrand giant could benefit from more streamlining of its portfolio. “We see incremental opportunity for portfolio rationalization via divestiture of the Sperry brand,” Duffy wrote. “If Sperry were divested as well, with the licensing of Stride Rite in 2017 and now the sale of Keds, the remaining businesses in the Waltham HQ would be just Saucony and the Kids business. This, perhaps, presents opportunity for office downsizing or consolidation.”
Meanwhile, DBI continues to show signs it’s hungry to grow under incoming CEO Doug Howe. The Columbus, Ohio-based footwear company in 2022 purchased Topo Athletic and signed the license for Le Tigre footwear.
The company has stated it sees significant opportunity to grow revenue for its in-house brands. Last year, it estimated that sales from all its owned brands, including Camuto Group national owned and licensed brands, will double by 2026, to equal almost one-third of total sales.
VF Is Putting Backpack Brands Up for Sale
In VF Corp.’s third-quarter earnings statement on Tuesday, interim president and CEO Benno Dorer confirmed that the company was “evaluating and deploying a series of strategic actions” to strengthen the company’s financial position.
He said these actions include a review of the company’s Global Packs business, consisting of the Kipling, Eastpak and JanSport brands. “While these iconic and profitable businesses are strong contributors of value, VF is committed to ensuring they are optimally positioned to achieve their full potential while enhancing management focus on the company’s greatest strategic priorities,” the company noted in the earnings release.
Bloomberg first reported in December that the JanSport brand, in particular, was up for grabs. Citing people close to the talks, the report said a deal could value the backpack and apparel brand at close to $500 million. Wedbush analyst Tom Nikic wrote in a December note that he was “skeptical” that VF could manage to raise $500 million for just JanSport. Other market experts have attached that number to the value of the entire Packs division.
Overall, analysts are encouraged by VF’s plan to focus more on its core brand portfolio, after seeing sales slide at Vans and Dickies in fiscal Q3. Its outdoor division has been a bright spot, though, led by strong gains by The North Face. (VF’s portfolio also includes Timberland, Supreme, Altra, Napapijri and others.)
Simon Property Sells Interest in Eddie Bauer
In June 2021, Eddie Bauer was acquired by Authentic Brands Group and SPARC Group, a joint venture between Authentic and Simon Property Group. This week, though, Simon Property announced on its fourth-quarter earnings call that it has sold its interest in the Eddie Bauer JV in exchange for additional equity ownership in Authentic. According to CEO David Simon, the mall giant now has a 12% stake in Authentic, valued at $1.5 billion.
The SPARC Group manages a robust portfolio that also includes Reebok, Brooks Brothers, Aéropostale, Forever 21, Lucky Brand and Nautica. But whether it will continue to add more names to the roster remains to be seen.
Authentic Brands is certainly still on a deal-making hot streak. To kick off 2023, the company announced a new partnership in January with basketball legend Allen Iverson, and rumors recently circulated that Authentic was in talks to potentially buy the beleaguered Bed Bath & Beyond and BuyBuy Baby retail chains.
As for Simon Property, its CEO is less enthusiastic about acquisitions. “We really don’t have any plans to acquire anything. If we do, it will be opportunistically,” said Simon on the earnings call this week. “Generally, there’s not a lot of distress in retail right now. I’m not saying it won’t develop in the year. But there are some brands out there that are in trouble that obviously people know about. But we don’t see playing in any of those situations.”
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