Retailing's 'endangered species' list
Industry expert says Borders, BJ's, Rite Aid could become bait for a private equity buyout.
By Parija Bhatnagar, staff writer

NEW YORK ( - Cash-rich private equity firms, which went on a retail buyout binge last year, are still trolling the industry and are poised to grab a few more players, according to one industry expert.

"In this environment companies that can't retool quickly enough, or those that are threatened by shareholder revolt, will get scooped by private equity firms," said Fred Crawford, a veteran retail consultant who helped Toys 'R' Us restructure its operations before a private equity buyout.

Why retailers?

Retailers are attractive buyout prospects because they typically carry relatively low levels of debt on the balance sheet relative to their sales turnover, therefore providing a quick influx of cash to private equity firms, said Crawford, a managing director with corporate turnaround and restructuring advisory firm AlixPartners, whose past clients have included Wal-Mart, Lowe's, Best Buy and FedEx.

Moreover, most big chains either own all or a significant chunk of their store locations, he said. Private equity firms can fund their buyouts by selling part of the retailer's real estate to a real estate investment trust (REIT) and then leasing the space back for the company from the REIT.

Finally, buyout firms prefer to have a short-term exit strategy of three to five years once the turnaround is complete, Crawford said. By taking a public retailer private, it keeps the company out of the glare of Wall Street and accelerates the turnaround process.

Given the advantages inherent in a retail takeover, private equity firms prowl for retailers that have come under competitive pressure but, with some readjustment or cost cutting, can stage a come back.

On the list

Book retailer Borders Group (Research) is a possibility, he said.

"Borders essentially is like a library with a cafe," said Crawford, adding that a buyout firm could help make Borders more current and competitive.

"Barnes & Noble (Research) offers so much more to its customers. It's a social space, it's a gift store that sells higher margin products and the merchandising overall is better, " he said.

Barnes & Noble also has a competitive advantage over Borders in the online channel, he said. "The largest group of consumers on the Barnes & Noble Web site are young people. So the retailer is successfully hooking consumers early," Crawford said. On the other hand, he said Borders' partnership with dilutes Borders' brand equity.

According to Crawford, a survey of 6,000 consumers conducted last fall by AlixPartners showed BJ's Wholesale Club (Research) significantly lagged rivals Costco and Sam's Club (a division of Wal-Mart) on the top five attributes most critical to consumers -- price, product, service, access and experience.

"BJ's owns the Northeast market but Costco and Sam's Club are making inroads in that region," Crawford said. "Time is not a friend to BJ's and I think it needs to look for a strategic partner to improve the business."

Moderate-priced home furnishing chains are in a tight spot and Pier 1 Imports (Research) is no exception. The company has struggled to improve its store traffic and sales over the past 12 months. Industry analysts point to a two-fold problem.

Non-traditional "home" retailers like Wal-Mart and Target are aggressively expanding into the home space and winning over younger customers. At the same time, mid-tier customers who want to upgrade their home furnishings are shopping at high-end chains like Ethan Allen where they feel they're getting better quality products for the money.

"Pier 1 can't hope to merchandise its way out of this situation," Crawford said. "The company has lots of cash and great brand cachet. This makes it attractive to a buyout firm. It would make sense to dramatically shrink its store base, liquidate part of the inventory and better integrate its online and store operations."

The problem with drugstore chain Rite Aid (Research), the No. 3 chain behind Walgreen and CVS, is that most people prefer to shop at its competitors' stores if they can, said Crawford.

"Consumers tell us that the service they receive at Rite Aid is below their expectations and its difficult to shop in its stores. The brand is losing relevance with consumers today," he said. "I think a buyout firm would focus on improving these two areas, particularly the redesign of the stores."

Other picks

Crawford's other picks spotlight two privately-held companies -- Academy Sports & Outdoors and WaWa.

Said Crawford, "Academy is a $1 billion sporting goods chain, mostly concentrated in the south. They sell equipment and clothing for any outdoor activity like hunting, fishing and camping."

The company operates more than 80 stores in 10 states. "They're growing fast. A private equity play would give more capital to punch out more stores quickly in anticipation of an IPO," he said.

Convenience store operator WaWa is another fast-growing regional retail chain concentrated in the Northeast, Crawford said. Wawa operates more than 550 Wawa Food markets. It also sells gas at more than 150 Wawa gasoline stores and owns its own dairy supply.

"This is a very innovative company. They sell their own branded coffee and other products," he said. " Private equity firms could be interested in Wawa for the same reasons as Academy by helping to accelerate its store expansion before an IPO."


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Click here for more on why big retailers are shuttering stores. Top of page

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