It seems to me that private equity is the elixir of the investment world. Got a problem with your business (publicly traded) and no short-term solution, sell it to a private equity firm who’ll shade you from those pesky shareholders who want returns now, not in five years. It’s a utopian thought but hardly the reality. Private equity wants returns just as fast as their public counterparts do, if not faster. A recent example of the quick turnarounds taking place in fashion deals is the sale of Jimmy Choo to Towerbrook Capital by Lion Capital in February after only 27 months. Another possibility could be Jil Sander, bought in February 2006 by Capital Change Partners. According to a
blog post in today’s edition of Portfolio magazine, its sale could happen by the end of the year. If so, this would be less than two years to change hands, not exactly the patience private equity firms usually exhibit.
So what gives? The quick answer is luxury fashion is hot. Investors are willing to pay premium prices for the opportunity to own the next great fashion house. This I understand. What I’m unable to grasp is the rationale for taking Liz Claiborne (LIZ) private. A recent column in the Fool.com makes the case that the company’s troubles are so extensive that only the dim of bright lights will allow the firm’s management the opportunity to turn this ship around and get it headed in the right direction. In other words, the vagaries of the market and it’s short-term thinking prevent those in charge from properly executing their vision for the future. This assumption would be a good one if the author were correct in his hypothesis that the patient was deathly ill. In the words of Mark Twain, “the rumors of my death are greatly exaggerated.”
Liz Claiborne, as my earlier post explained, is not on death’s doorstep but rather in the middle of a much needed retooling. Yes, the company has completely misread the direction department stores were moving but in their defense, they’ve already adapted to the new reality with deals done (JC Penney/Liz & Co.) or those in the works, creating a template for future partnerships with other chains. As for the independents, LIZ still represents a solid brand to sell and with Tim Gunn’s (Project Runway, Parsons The New School of Design) creative lead, they’ll get things right on the fashion side of the ledger.
The article in the Fool refers to the SG&A (selling, general & administrative) costs rising in step with an improving gross margin, suggesting that the company missed an opportunity to leverage those costs to produce greater profits for shareholders. This, on its own, is an accurate statement. However, the writer fails to mention some of the reasons for the rise in SG&A costs. Right off the bat I can think of one huge cost included in the numbers: store openings. How many retail stores do you think Liz Claiborne opened between 2001 and 2007? Over 300 if you combine the outlets with the specialty stores like Lucky Brand and Juicy Couture. In addition, the company’s Mexx stores (acquired 2001) in Europe and Canada operate at a higher expense level then the stores in the United States. I’m not saying they couldn’t have kept a lid on SG&A costs, just that it’s understandable given the expansion. Management will simply cut out the fat, eliminating redundant positions and brands. In no time, operating expenses will be lower, enabling them to hold on until the wholesale biz rebuilds itself.
The Fool suggests that the company needs to move out of the public eye in order to iron out its inefficiencies, and suggests private equity can do this faster. This is pure poppycock. Private equity, in my opinion, is no more likely to do a better job cutting the fat then publicly traded businesses. The only reason people believe this theory is once private we forget about them. In this instance, I believe that shareholders will actually benefit by the company being in the public eye. For every success William McComb has going forward, the stock price will move ahead in recognition of victory, no matter how small. If it’s private, at the end of the day, it’s either IPO material or its not. There’s no in between.
Liz, take two years to fix the problems, and then move ahead. You have the stuff to be successful. Don’t fall for the private equity song and dance. It’s very contagious these days.
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