Belk agrees to sell the company for $3 billion to Sycamore Partners

The Belk department store at SouthPark mall
The Belk department store at SouthPark mall The Charlotte Observer

Belk executives say they don’t expect customers and employees to see big changes from the deal announced Monday to sell the Charlotte-based department store chain to a New York private equity firm for $3 billion.

No store closings or layoffs are planned at the nation’s largest family-controlled department store, and the buyer, Sycamore Partners, supports the company’s brand and merchandise offerings, CEO Tim Belk said in an interview. The headquarters will remain in Charlotte.

“The Belk that (customers) love is not going to change,” Belk, who will remain as CEO, told the Observer. “We’re going to continue to build on the foundation we’ve put in place.”

A deal for Belk had been expected since April when the company said it was exploring a possible sale, and Sycamore had emerged as the possible buyer last month. The sale would end local control of the 127-year-old retailer that began in Monroe and grew to become one of Charlotte’s iconic companies.

Analysts said the sale is an attractive deal for the Belk family, which controls more than 70 percent of the company’s stock. But Sycamore is making its first foray into the department store business at a challenging time for the industry. Belk is under pressure to compete with brick-and-mortar stores as well as online retailers.

“This is perfect timing for the Belk shareholders and terrible for the buyers,” said Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates Inc. “The department store sector is terrible. I cannot explain why the buyers wanted it.”

Macy’s and Kohl’s, for example, both recently reported a slump in second quarter earnings as shoppers scaled back on traditional items like clothing and gravitated more to services and dining out.

“They say they won’t have firings or close stores, but what will they do when the results are bad?” Davidowitz added.

Brian Hamilton, chairman of Sageworks, however, called the acquisition a “pretty good deal” for everyone involved.

“Sycamore is getting a solid company, with a proven track record of profitability, positive cash flow from operations, and consistent revenue. Belk is getting what appears to be a fair offer, valuing their company at 20 times their trailing earnings,” said Hamilton, whose firm provides research on private companies.

The deal, which includes the company’s debt, is subject to regulatory approval and is expected to close in the fourth quarter this year, according to a securities filing.

While Tim Belk will remain CEO, his brother, Johnny Belk, said in an interview that he will remain the company’s chief operating officer through the end of January, but will then leave to pursue “other interests.” It is unclear what he will do and who will assume the COO role.

Southern brand

Tim Belk said the company plans to grow by “executing our current strategic initiatives and undertaking new growth initiatives together with Sycamore,” calling the transaction “an across-the-board win for our stakeholders.”

Belk added that Sycamore Partners thinks the company’s brand – “Modern. Southern. Style.” – “has legs” and sees the position as something on which the company can capitalize. That means promoting certain brands that resonate with Southerners – such as Lilly Pulitzer – and growing popular private labels like Crown & Ivy women’s apparel.

Stefan Kaluzny, Sycamore Partners managing director, said in a statement the firm has “great respect” for Belk’s management team, employees, brand, store footprint and growing online presence.

“Belk is exactly the kind of investment we look for: An outstanding brand with a proven success formula and the potential for further growth,” he said.

Sycamore has a portfolio consisting mostly of investments in specialty apparel companies including Aéropostale, Coldwater Creek, Hot Topic, Jones New York, Nine West Holdings and Talbots. The firm, which has more than $3.5 billion in capital under management, says its strategy is to partner with management teams to improve profits and the value of their businesses.

Mark Cohen, a director of retail studies and adjunct professor at the Columbia School of Business, said Sycamore Partners may see Belk as a place at which to boost sales of its other brands. For instance, when Sycamore Partners bought Jones New York, the women’s accessories and clothing retailer, last year, it decided to close all 127 of the chain’s brick-and-mortar stores. Belk carries Jones New York items.

“The consolidation of department stores has resulted in a lot fewer places to put products,” Cohen said.

Neither Sycamore nor Belk would comment on the financial terms of the deal. Private equity companies generally fund big purchases in part with their own money but mostly with bank loans.

CEO Belk said Sycamore Partners hasn’t laid out a timetable on what they want to do with the company next, such as holding an initial public offering or selling it to another buyer, though the typical time frame is five to seven years.

In the deal, Belk shareholders will receive $68 a share in cash for each share of Belk common stock they own, the company said. Although the stock doesn’t trade on major exchanges, Belk’s shares trade over the counter, and the company reports its quarterly results and other financial details like a publicly traded company.

The biggest block of the company’s Class A stock – 26 percent – is held in a series of family trusts. Katie Belk Morris, the sister of CEO Tim Belk and the chair of the Belk Foundation Board, has beneficial ownership of those shares, meaning she has, or she shares, voting power for the stock or has the power to sell it. It does not mean Morris personally owns the shares.

Sarah Belk Gambrell, daughter of founder William Henry Belk and Tim Belk’s aunt, has beneficial ownership of 25 percent of the Class A shares. Tim Belk has beneficial ownership of 10.8 percent of the company Class A shares, while Johnny Belk has beneficial ownership of about 11.3 percent of the Class A shares.

The company said certain Belk stockholders have agreed to back the transaction, giving the deal the support of a majority of the voting power of the company’s shares. Class A shares are entitled to 10 votes vs. one vote for each Class B share.

Local institution

Belk, now one of the Charlotte area’s biggest employers, was founded in Monroe in 1888 by William Henry Belk, who named his first store New York Racket. Over the years, the chain has expanded to 296 stores across 16 states, mostly in the Southeast.

The family name is all over Charlotte: It adorns a freeway, uptown theater and college football bowl game. The company’s former CEO, the late John Belk, was a longtime Charlotte mayor, and family members have headed the Charlotte Chamber.

In the late 1960s, John Belk and fellow retailer George Ivey helped create SouthPark mall, spurring dramatic growth in south Charlotte that continues today in the SouthPark area, as seen in the construction boom of new homes and apartments, offices and more restaurants and retailers.

Charlotte Chamber of Commerce CEO Bob Morgan said John Belk was “uniquely committed to the growth of the Charlotte airport,” which made the city an attractive place for businesses to build their corporate offices.

“It’s fair to say that Charlotte is the headquarters hub it is today ... because of the Belk family,” Morgan said.

The retailer has faced increasing challenges as consumers shift more to online shopping. Belk was relatively late to focus on e-commerce: Until 2008, its website offered only gift cards, gift registries and a small selection of home goods. Since then, the company has invested $150 million to overhaul its website and has hired more IT workers.

On Monday, Tim Belk said accelerating e-commerce growth remains the company’s “No. 1 priority.”

Last year, Belk’s sales totaled $4.1 billion, an increase of 1.8 percent over the prior year. Sales at stores open at least a year rose 1.5 percent for the year, and online sales grew 43.3 percent.

But the company’s profits dipped. Belk said its earnings totaled $146 million for last fiscal year, a 7.8 percent drop from the year before. The company attributed the decline to Belk’s investments in e-commerce and remodeling stores.

Leadership also could be another reason Belk put itself up for sale, analysts say. No other Belk family members are listed among the top management at the company, and people familiar with the company have said there doesn’t appear to be a fourth generation of Belks being groomed to run the company.

Some of Charlotte’s best-known retail names have been snapped up in the past year. Matthews-based supermarket Harris Teeter was sold to Cincinnati-based Kroger, and Family Dollar’s sale to Chesapeake, Va.-based Dollar Tree closed in July.

Staff Writer Ely Portillo contributed

Belk facts

▪ Headquarters: 2801 W. Tyvola Road

▪ Employee count: 1,300 at headquarters, 23,000 companywide

▪ 2014 sales: $4.1 billion

▪ Number of stores: 296

▪ Founded: 1888, in Monroe