Under its new ownership, Belk executives say customers and employees won’t see many big changes. Given the nature of a private equity buyout, though, analysts say some shifts are unavoidable.
After Belk said this week it had agreed to sell itself for $3 billion to New York-based private equity firm Sycamore Partners, the company said there won’t be any store closures because of the deal, or layoffs at the retailer’s Tyvola Road corporate offices, where it employs about 1,300.
Tim Belk will remain at the helm of the department store chain, and its headquarters will remain in Charlotte. The only employment shakeup the Belks and their new bosses have mentioned is the departure of Johnny Belk, chief operating officer, at the end of January,
A private equity firm’s goal in any deal is to make a business more profitable, however, and experts say some behind-the-scenes changes are inevitable, though they might be painless and often will be imperceptible to the public.
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That’s probably a sigh of relief for the fiercely loyal Belk customers who have shopped at the local chain for decades. Analysts say a new owner would be smart to preserve the brand, built around “Modern. Southern. Style.”
“There is a huge allegiance to a local retailer, and the consumer base down there certainly knows exactly that this is a store designed for them and merchandised for them,” said Marshal Cohen, chief industry analyst at the NPD Group.
Openings and closings
There will continue to be store openings, store closings and store expansions just as there have been in years past, Belk executives said this week. “Net square footage will remain the same,” Tim Belk told the Observer.
This summer, for example, Belk closed a store in Fayetteville but also said it plans to more than double the size of a store in Mobile, Ala., to create a new flagship location. Belk will also close its store in Culpeper, Va., in January.
“Anytime there is an acquisition of this size, every store gets assessed. The first thing to do is to determine what works and what doesn’t work, and get rid of the ones that don’t work right away,” Cohen said.
Currently, Belk operates 296 stores in 16 southeastern states.
Belk and Sycamore said they’re planning on growing the chain, and that doesn’t imply any kind of mass store closure, noted Liz Dunn, chief executive officer of consulting firm Talmage Advisors.
“It seems like it’s more the plan to optimize performance, make some of these necessary investments and look in contiguous markets for growth, as well as to e-commerce for growth,” Dunn added.
Sycamore Partners declined to comment for this story.
Boosting portfolio brands
Sycamore’s portfolio includes investments in specialty retailers such as Nine West, Coldwater Creek, Aéropostale, Hot Topic, Stuart Weitzman and Jones New York. Belk is its largest deal yet, and its first department store purchase.
A big reason Sycamore may have wanted a chain like Belk is to have a place from which to sell some of those other brands, a few of which are struggling, said Mark Cohen, director of retail studies and adjunct professor at the Columbia School of Business.
This could mean giving certain brands like Sycamore-owned Kasper (women’s suits) more inventory, floor space and marketing. “It’s like a manufacturer who happens to own a retail business and places his goods in that business,” Cohen said.
What’s more, Sycamore Partners already owns a sourcing company called MGF Sourcing that it could leverage, analysts say, to trim costs.
Belk’s current sourcing company, Chinese supplier Li & Fung, handles the retailer’s international sourcing, which constitutes about 30 to 40 percent of all of the company’s private brands, said Jessica Graham, the store’s spokeswoman.
“When you become part of a syndicated process, now all of a sudden, there’s some buying power there,” NBD’s Cohen said. “A family-run business doesn’t have that luxury.”
Tim Belk also said this week that Sycamore has expressed interest in growing Belk’s private labels like Crown & Ivy, possibly even giving it a website and its own standalone stores.
“Private label programs are usually strong margin builders because you’re cutting out a middle man. They also deliver better value to consumers because they’re typically lower priced than national brands,” Dunn said.
With the rise of e-commerce, it’s gotten more popular recently for brick-and-mortar chains to sell their real estate portfolio, or part of it, to a real estate investment trust, then lease the property back, Columbia’s Cohen said, to generate cash for the owners.
Belk owns approximately half of its store locations, according to Graham. Cohen said Sycamore could find it attractive to sell part of that real estate and have Belk lease it back.
“The good news is the shareholder – in this case Sycamore Partners – sees a lot of money in those assets. The bad news Belk (would have) to start paying rent,” Cohen said. Neither Belk nor Sycamore would comment on whether such a scenario has been discussed.
Investors in Macy’s have pressured that department store chain to sell some of its real estate. Macy’s owned or had ground leases on more than two-thirds of its 823 stores as of Jan. 31, the Wall Street Journal recently reported, and its three flagships in New York, Chicago and San Francisco are valued at nearly $7 billion.