Retail Carnage (Part 4) – Are Controlling Families Starting Their Engines?

Last week we learned that the Nordstrom family, owners of roughly 30% of the large department store chain bearing their name, has begun the process of exploring a bid to take the retailer private. Given the public market environment for apparel and accessories retailers these days, this should not come as a shock to most Wall Street followers. Nordstrom has been a family business for many decades and spending valuable time and energy justifying to analysts and small shareholders why management is making large investments aimed at cementing their competitive position, or giving guidance about how strong or weak store traffic and same store sales have been in recent weeks, can only really be characterized as suboptimal for long-term stakeholders in the company.

Given Nordstrom’s strong relative position in the department store sector (only around 100 full line stores in higher end malls, and a growing off-price chain that caters to higher priced merchandise), I do not think it will be difficult for the Nordstrom family to find partners to help them take the retailer private. Whether they are willing to pay a price that the rest of the shareholder base will accept is another question entirely, but a  price starting with a “5” would probably get the job done.

Are there other retailers with large concentrations of family ownership that have probably mulled the going-private idea already and might be more inclined to take steps in that direction if the Nordstrom family succeeds? I certainly think so. Two names I would offer up are Dillards (DDS) and Urban Outfitters (URBN).

Both companies are far smaller than Nordstrom in terms of market value and therefore would be even easier deals to consummate. Three members of the Dillard family, directly owning roughly 13% of the equity, currently serve on the management team and have to be thinking that they too could benefit from a leveraged buyout transaction. The odds of department stores ever getting respect from public investors again are slim, in my view. Taking the company private, and owning all of that valuable real estate themselves, would be a very solid result for the family.

The Hayne family, founders of Urban, are less well known but they have retained a very large stake in the company, one that only grows as more and more shares have been repurchased with free cash flow in recent years. The Hayne family owns a near 30% stake and Urban’s balance sheet makes a deal even easier ($400 million of cash and no corporate debt). At $17 per share, the company sports an enterprise value of just $1.6 billion, versus $473 million of EBITDA in 2016 (free cash flow for the year was a impressive $271 million.

I think the odds are very low that none of these three retailers completed family-led LBO deals over the next 12-18 months. Two deals would seem very possible and a trifecta is even conceivable. After all, if the Nordstrom family is successful, the others are not going to want to balk and potentially look silly three to five years down the road.

Full Disclosure: Long Nordstrom equity and Dillards debt at the time of writing, but positions may change at any time

3 thoughts on “Retail Carnage (Part 4) – Are Controlling Families Starting Their Engines?”

  1. Hi! Good article, I loved reading it.

    I think the Buckle, inc (BKE) is another apparel retailer that could be a candidate for a take private : market cap of $860M (stock down 60% since last peak in 2015), $261M of cash and no debt on balance sheet, FCF of $120M in 2016, founder D Hirshfeld and management own a 40% stake in the company.

    Brice

  2. Very interesting series on retail.
    What do you think about Foot Locker? They have a solid balance sheet and have been competing with online only competitors for over a decade but continue to grow.
    I know it’s anecdotal, but I’ve always found shoes to be one of the most difficult things to buy online. Almost every shoe purchase starts with the old Brannock device and ends with a demo walk around the store. I suppose one could always try them on at FL and buy online but the FL sales figures suggest this has not been the trend.

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