Mergers and acquisitions for fashion retailers are like a crop top t-shirt: a risk best braved by a select few and avoided after a certain age.
Abercrombie & Fitch Co (ANF.N), the teen brand with a 125-year heritage, became the latest to demonstrate that on Monday, ending talks about a potential sale after failing to agree terms with potential suitors.
Successful deals in the mercurial world of U.S. fashion are rare, and now look even less likely to succeed as sales dip across the board. Cost savings can be counterproductive if it means squeezing money out of marketing and design, and buyers are taking a risk on a style that can easily go out of favor.
As a result, established brands like Abercrombie are having problems finding a savior.
“Often, as well as spending the money to buy the brand or business, you then have to spend more to do something strategic that will propel growth, and that means paying out twice before getting a return,” said Neil Saunders, managing director of market research firm GlobalData Retail.
Five of the 20 companies involved in the biggest private equity apparel deals of the last decade have been restructured or gone bankrupt. All struggled under the debt load of a leveraged buyout. The biggest acquisition, Apollo Global Management’s roughly $3.1 billion leveraged buyout of Claire’s Stores Inc, restructured in 2016.
The second-largest acquisition, J. Crew Group Inc, which TPG Capital and Leonard Green & Partners bought for about $3 billion, is now being restructured. Gymboree Corp filed for bankruptcy last month, seven years after Bain Capital’s $1.8 billion purchase.
Many U.S. fashion bosses are finding they have no option but to consider a sale as pressure mounts from more affordable fast-fashion chains from Europe such as Zara (ITX.MC) and H&M (HMb.ST), and customers abandon malls in favor of Amazon.com Inc (AMZN.O) and other online retailers.
Outerwear brand Eddie Bauer, for example, is exploring a sale while also seeking relief from its debt load, sources have told Reuters. Teen brand American Apparel explored a sale last year before ultimately filing for bankruptcy.
As Abercrombie’s experience shows, finding a willing buyer at the right price is difficult.
“Public company board members are reticent about green-lighting large-scale mergers and acquisitions because it’s hard to find a good example of a business that has been rewarded by the equity market for doing so,” said Rohit Singh, who specializes in retail at UBS Investment Bank, not speaking specifically about Abercrombie.
Struggling retailers are a tough sell to potential acquirers. Merging with another company risks double the trouble – more brands falling flat and more stores bereft of customers.
Most fashion retailers are locked into store leases, and as landlords watch their malls empty out, they are increasingly unwilling to give their tenants an easy path out.
“Perhaps the reason the Abercrombie deal didn’t get done was that they’ve got way too many stores in way too many malls that don’t make any money, and the cost to unwind those pieces and get out of those stores is just too great to compensate for the upside,” said Mark Belford, a retail specialist at KPMG Corporate Finance.
After failing to strike a deal, Abercrombie now has no choice but to go it alone. On Monday, the New Albany, Ohio-based retailer said it will focus on its growing surf-wear brand Hollister and try to reposition its flagship brand, which has reported falling quarterly sales since 2014.