After Sycamore’s Chico’s Deal, Is an IPO Next?
Chico’s FAS seems like a no-brainer addition to Sycamore Group’s new specialty fashion portfolio.
The private equity firm last month formed KnitWell Group, a holding company for Ann Taylor, Loft and Talbots, where Chico’s would fit it seamlessly if Sycamore’s $1 billion offer for the specialty fashion firm goes through. Some saw the KnitWell’s emergence as a sign that Sycamore could sell the group. But KnitWell plus Chico’s might signal that an IPO is on the horizon.
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According to Sucharita Kodali, vice president, principal analyst at Forrester Research, Sycamore is following the “typical PE playbook.”
“It’s a cash flow positive business,” she said of Chico’s. “You take on debt and use the cash flow to make interest payments, while hoping sales don’t decline as you cut expenses. And then hopefully you create so much value that you sell it again or take it public. Or you don’t and declare bankruptcy. It happens all the time.”
Others think Sycamore is more interested in the chain’s more than 1,250 stores. The private equity firm’s also owns Lane Bryant, Hot Topic and Torrid.
Forming KnitWell gives the women’s businesses a degree of heft and back office synergies. The holding company can negotiate better sourcing and supply deals to build economies of scale. Talbots CEO Lizanne Kindler moved over to executive chair and CEO of KnitWell, working with senior leaders at the three brands.
In a statement on Thursday, Langenstein said Sycamore’s investment lends Chico’s “additional expertise, financial resources and strategic flexibility.”
“Sycamore Partners has an outstanding record in the retail industry in partnering with management teams to help businesses reach even greater levels of success,” she added. “They share our commitment to providing solutions, building communities and creating memorable experiences to bring women confidence and joy.”
It wasn’t immediately clear if Langenstein would stay if the deal closes. Retail analyst Jeff Lick at B. Riley Securities said the likelihood of Chico’s of finding a better offer is “extremely low,” while he praised Langenstein as “essential to Chico’s continued success.” If Langenstein is “implicitly backing” the Sycamore bid, then others would have “limited interest without her continued participation as the company’s CEO,” he added.
A spokesman for Sycamore declined comment on Langenstein’s future role after the deal closes. She joined Chico’s in August 2019 as president of the apparel group. Chico’s was losing money and sales were down 6.7 percent when she came aboard. It was consolidating vendors to rely less on China. Langenstein became CEO and president in June 2020.
Under Langenstein’s leadership, Chico’s focused heavily on digital transformation. It also closed unproductive stores. A focus on sustainability prioritized “mindful fabrics” including natural fibers, synthetic fibers from recycled yarns, and cellulosic fiber from wood. And it pursued eco-friendlier denim finishing.
During last month’s earnings call, Langenstein cited healthy full-price sales at Chico’s, White House|Black Market and Soma, saying that the company “attracted new customers and gained market share” with “trend-right product.” Net income for the quarter jumped 41.4 percent to $59.3 million, while net sales fell 2.4 percent to $545.1 million. On an adjusted basis, diluted earnings per share was 28 cents, besting Wall Street’s consensus expectations by 1 cent.
For Sycamore, the third time’s the charm. Its $938.1 million all-cash deal, or $7.60 a share, is expected to close in the first calendar quarter of 2024. It couldn’t finance a $3 billion deal to acquire Chico’s in 2015. Four years later, the Chico’s board gave Sycamore the cold shoulder on several offers that went as low as $353.8 million.
What also isn’t clear is how Sycamore would impact Chico’s current sourcing, supply chain, and current sustainability efforts. Sycamore paid $193 million for a 51 percent controlling interest in Mast Global Fashions (MGF) Sourcing from L Brands Inc. It purchased the remaining stake in MGF in 2015.
Just look at Talbots. The women’s specialty chain used to be known for mostly cotton or wool fabrics. In the past two years, customer reviews have criticized the brand’s blended fabrics, such as wool or cotton with nylon, polyester or rayon thrown in. Talbots also seems to be selling more acrylic blends. Unhappy reviewers say the fabrics look cheap and pill more easily. Many market sources believe that Sycamore’s fashion firms source from MGF.
Jessica Binns contributed to this report.
