Buying out the store

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Fortunoff takes a private equity buyout while Sears tries to boost business. Play video

NEW YORK (CNNMoney.com) -- With retail stocks getting clobbered and sales growth expected to hit the skids in 2008, buyout firms say the retail landscape is a veritable goldmine of hot prospects.

"We have half a dozen active deals we're involved in right now," said Love Goel, CEO of Growth Ventures Group, a global private equity firm that's focused on retail investment.

From a valuation perspective, Goel said the fact that retail stocks are down significantly over the past 12 months makes the entire sector very attractive for private equity firms looking for bargains.

To his point, the S&P Retail index is down about 30% over that period.

On a sector basis, department store stocks in the index are down about 40%, clothing store stocks have fallen 32% while shares of specialty stores have lost about 35% over the past 12 months.

But unlike the multi-billion dollar mega deals of the past two years, industry insiders, citing a more cautionary investment environment, say private equity money this year will target midsized merchants in deals priced between $100 to $500 million.

One example came Monday when high-end home furnishings chain Fortunoff announced that it agreed to be sold to NRDC Equity Partners. NRDC will invest $100 million in Fortunoff's business.

Another example: New York-based private equity firm LNK Partners made a similar-sized investment in restaurant chain Au Bon Pain, which it agreed to acquire in January.

Besides low valuations, Goel said the other driver for retail buyouts is the opportunity to acquire distressed chains - such as Pier 1 Imports - whose brands still resonates with today's consumers but are in desperate need of a wholesale makeover in terms of merchandise, store design and marketing.

Buyout firms typically have a five to seven-year turnaround timetable for their investments. So the quicker the turnaround, the sooner these firms can cash in by selling their investment in a relatively short period of time.

Michael Appel, managing director of Quest Turnaround Advisors, is sweet on retailers because store chains generally generate plenty of cash and relatively low debt.

"A few retailers have other assets like company-owned credit cards and real estate that can be monitized," Appel said.

Still other chains are just undermanaged or poorly managed.

"A buyout firm may think it can unlock the underlying value of the company by changing management or by improving [product] sourcing and streamlining operations," Appel said.

Goel said he's already spotted plenty of candidates among clothing sellers and the niche specialty arena.

Among them is Charming Shoppes (CHRS), which operates women's apparel chains Lane Bryant, Fashion Bug, Catherines Plus Sizes and Petite Sophisticate and men's clothing chain Casual Male (CMRG).

"Cost Plus is another one and the assets of Sears could look very interesting too," he said.

Sears Holding (SHLD, Fortune 500), which operates Sears and Kmart department stores, recently said it was restructuring its business in a bid to lift sagging sales and profits.

Although the retailer didn't mention specific plans to divest some of its real-estate holdings, Goel said a lot of value could be unlocked from such a move.

Gander Mountain (GMTN), a seller of outdoor recreational clothing and equipment, and home furnishing seller Restoration Hardware (RSTO) rounded out his picks.

Appel is a little less discriminating. For him, any retail stock that's trading under $10, and has sat there for a while, is in play.

That includes women's clothing chain New York & Co (NWY)., he said.

"There's still a lot of regular private equity money to go around especially for distressed companies," he said. "The issue isn't the money but the timing. Some of the best deals are done when times are tough."