Solomon Partners on Dealmaking in an Uncertain World – WWD

With fashion stuck in a very uncertain part of the economic cycle, many dealmakers are staying on the sidelines. 

But they’re still keeping a close eye on the market and biding their time, waiting for when the ground is a little firmer under foot in the consumer world.

And direct-to-consumer companies, brand management firms, everyday luxury, outdoor and active are all among spaces to watch, said Cathy Leonhardt and David Shiffman — coheads of consumer retail at Solomon Partners, which has a long history of fashion dealmaking and was previously known as PJ Solomon.

While there are still some deals getting done — Solomon recently advised Designer Brands Inc. on its acquisition of Keds from Wolverine Worldwide Inc. — it’s the second half of the year that holds more potential for acquisitions.

WWD caught up with Leonhardt and Shiffman to see where the market is today and where it’s headed. 

WWD: It’s been relatively quiet on the deal front. What’s going on this year, what’s bubbling beneath the surface?

David Shiffman: There’s probably more deal activity than the market’s aware of. There are a significant number of conversations, both strategic dialogues and with private equity firms around the retail sector. 

As the market gains more stability, as the credit markets regain their footing, as confidence builds in terms of management teams and boardrooms, you’re going to see more deal activity, likely more in the back half of the year. 

WWD: Where is there potential for deals? 

D.S.: You’ll see strategics looking to acquire both healthy and growing traditional retail businesses or omnichannel [players], as well as, we see a lot of interest in continuing to buy d-to-c businesses. Another area where you’ll see activity is you will see large retailers rationalizing their portfolios.

Cathy Leonhardt: In the sponsor [private equity] market, what we’ve seen is a dramatic pullback in consumer discretionary. They still want to play in consumer, but in this uncertain economy, they’re going for more [companies focused on] repeat purchases, subscription, but also services.

What we see in the first quarter is the deals that were out in the back half of last year, that’s where a lot of the deal volume’s going to come from. Buyers are more cautious and they wanted to see where the year came out, how business is trending into the beginning of the year.

D.S.: There’s enormous opportunity in front of the brand management companies. There’s half a dozen major players in that space and they are buyers of many businesses. 

WWD: Does the rise of brand management signal a changing of the guard or a change in what’s important in business today? 

D.S.: It signifies a shift in channel that reaches the consumer. So many of the gray-bearded apparel businesses had wholesale models through the department store channel. Obviously the department store channel has consolidated over time with significant pressure on the middle market piece of that channel. So you’ve seen Sears disappear, you saw JCPenney restructured, you saw Stage Stores liquidated, you saw Stein Mart liquidated. 

You’ve seen the stronger global brands take their business direct. Where brand managers have stepped in is, brand managers have facilitated the ability to take those brands through different channels. 

C.L.: There’s a shift in the risk profile of their model. There’s also an inherent expansion of the brands they buy. They’re also taking these brands more global than perhaps the brands would be able to do themselves. 

WWD: I wanted to drill down on the consumer piece. Is it the 2021 direct-to-consumer IPOs that are targets? 

D.S.: The better, the healthier d-to-c businesses that the strategics are looking for are smaller in size, growing rapidly, but profitable and mostly private. The class of 2021 IPO d-to-c players, they’re working to create profitable business models to prove to the public investor universe that they have the right to exist. As such, they have to get themselves profitable in order to do that.

WWD: It’s a funny time in the economy. It’s expensive to raise money right now, but stocks are also at a low. Is there a potential for bigger deals? 

C.L.: You have to take it sector by sector. In beauty and luxury, the struggle in M&A is there are fewer and fewer assets of scale to chase. What’s left of scale in beauty and luxury?

WWD: There’s only so many 200-year-old trunkmakers to fancy up. 

C.L.: That is well said.

D.S.: This doesn’t feel like an environment where you’re going to have the mega cap transformational deals. Historically we’ve seen those deals in more bullish or robust markets, both in terms of the economy, in terms of cost of money, in terms of positive sentiment.

WWD: Is there hope for the apparel deal making market? 

C.L.: Some will get done selectively, but in soft lines, the deal making has been centered on intimate, active, and footwear over the last three years. That’s where most of the attention goes. And then the brand management guys tend to lead the activity in apparel.