Thursday, November 18, 2010

Conference Notes | The 2010 ACG Retail Conference

One thing I've been doing more often for my job is attending conferences to see how PE firms (clients, prospective ones, and other firms) are doing and what's been going on lately with them. When I go to a conference, I'll put some key takeaways in posts like this one. Enjoy!

On November 18th, the Association for Corporate Growth's New York Chapter hosted a Retail and Consumer industry-focused conference entitled "Retail/Consumer Dealmaking - The New Frontier." Located in the New York Athletic Club, it attracted multiple PE firms and service providers and had 2 panels, 1 dedicated to senior lenders and another for the private equity side. You can find the panel bios here.
It also had a great one-on-one lunch conversation with Rick Perkal of Irving Place Capital (formerly Bear Stearns Merchant Banking). It's nice to hear what Rick has to say as he's one of the few executives out there who's a blunt and straight-forward speaker about PE's involvement in the Retail industry, along with what Irving Place has been up to. They've been busy too; they closed 6 deals recently!

Some takeaways:

  • Retail is in a "periscoping" stage: Michael O'Hara of Consensus Advisors said that ther ewas less growth and inventory amongst retailers in 2008, and you saw more cleaving off of growth through store closures, layoffs, and restructuring. In 2010, retailers are popping their heads out, but are still pretty quiet in terms of growth.  It's almost a "quiet normalcy."
  • Inventory turnover is more important than ever: Tim Tobin of GE Capital mentioned that if retailers cannot sell a product, they will mark it down to a point that they can get rid of inventory ASAP to restock with new/successful products. Dana Telsey of Telsey Group also mentioned a "need for speed" regarding inventory turnover, and she listed multiple retail areas that have had different strategies, from outlet malls and big-box retailers to specialty retail stores like J.Crew.
  • "Newness" is key: Retail in general has low barriers to entry. How can retailers survive against the Wal-Marts and Targets of the world? Simple: distinguish yourself. Jeff Edelman of RSM McGladrey noted how consumers are going from "desperate to rational" and that while stores like TJ Maxx and Marshall's were not their first choices for clothes, it is now because of their product selection. Macy's and Bloomingdale's are also recognizing how to promote luxury and luxury-style brands and products to attract more customers, especially with the holiday season coming up. Ms. Telsey also mentioned "competitive newness," citing Aeropostale's $3 t-shirts and the onslaught of H&M, Zara, and Uniqlo as examples.
  • Middle-market growth is still tempered: Burt Feinberg of CIT Capital Finance listed EBITDA multiples of mid-market retailers ($10-$30MM EBITDA) at 2.5-3.5x, whereas large-cap ($100-$300MM EBITDA) is more around 5x. The middle market retail sector is going to grow much slower, but it again depends on how they can distinguish themselves from big-box competitors.
(If you have more questions about the conference, feel free to let me know in the Comments feed!)

Here's my take on PE (particularly middle market) and retail: 
  • While margins are much higher in the luxury goods space, it's much more dangerous as the target consumer is emotionally driven towards buying. In other words, they have the money to spend, but their emotions will only determine whether they're actually willing to  shell out a few hundred dollars for a pair of Louboutins, a Burberry trench, or a Tiffany's necklace. 
  • I agree with Dana on looking for middle-market specialty retailers that have an edge in terms of products they offer; this is why Hot Topic (the goth store) is still around, for example. 
  • Another area to consider is European small and mid-size brands like Cath Kidston that are slowly coming to the USA. Mall operators want to fill spaces, and the pop-up shop concept is growing (and even companies owned by Sun Capital Partners, as Aaron Wolfe said, are taking advantage of it).
Overall, it was a great conference. Kudos to ACG New York and the other sponsors (I can't remember them all, sorry!) that hosted the event. Plus, the food at the NYAC was pretty good!