It’s been nearly half a year since private equity firm Sycamore Partners completed its $3 billion purchase of Belk, and experts say the deal couldn’t have come at a better time for the Belk family – nor at a worse time for the new owners.
Competitors of the Charlotte-based chain kicked off retail earnings season this week with a thud. Macy’s, for example, reported its worst quarterly sales since the recession. Nordstom’s said sales at stores open at least a year fell for the first time in almost seven years. And J.C. Penney Friday also reported a surprise drop in first-quarter sales.
“It’s tough, I’m telling you. I think the Belks are probably high-fiving each other that they got out in time,” said Mark Cohen, director of retail studies and adjunct professor at the Columbia School of Business.
To be sure, a change in ownership is difficult in any economy, especially for a homegrown, regional retailer with a loyal customer base. But given the retail industry’s challenges, the sale of Belk was especially smart, experts say.
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The boom in online shopping, competition and changing consumer preferences all contribute to the pains department store chains are feeling. An unusually warm winter this year compounded retailers’ woes.
The retail industry is one that tends to “ebb and flow,” so more consolidation, like the Belk-Sycamore Partners deal, is inevitable, said Marshal Cohen, chief industry analyst at the NPD Group.
“Either poor performers close, or you might see retailers who are challenged by figuring out the right formula become very attractive to get bought out,” Cohen added.
Since it’s private now, Belk doesn’t publicly release its financials. Belk and Sycamore Partners declined to make executives available for an interview.
Some changes at Belk
Since Sycamore Partners bought Belk in December, the chain closed stores in Culpeper, Va., Eden, N.C., and Union, S.C., and opened one in Euless, Texas. It currently operates 294 stores total. In 2007, Belk operated 311 stores.
Closing underperforming stores is one of the first steps management of a retail chain can take to improve profitability, experts say. A careful analysis has to be performed of each location, Columbia’s Cohen said.
“You have to ask yourself the question, ‘Is there something reasonable we can do that can restore the performance of the store? In many cases the answer is, ‘There’s nothing we can do.’ And if that’s the case, the store is losing money, then it’s got to go,” Cohen said.
Macy’s made that decision last year when it said it was closing 40 of its 770 stores, including one North Carolina store in the Cary Towne Center.
Also since the ownership change, Belk has also lost a few executives. Johnny Belk, who served as chief operating officer, left his position in January to “pursue other interests.” Ralph Pitts, who was Belk’s general counsel, left the company at the end of January.
The company has said its headquarters will remain in Charlotte, and Tim Belk will remain CEO. In April, the retailer signed a 15-year lease for its corporate headquarters on Tyvola Road.
Another big way Sycamore Partners could reap returns from its purchase of Belk – its first department store acquisition – is to sell off some of its real estate. Belk owns approximately half its properties, the company has said.
That’s not a surefire money-maker, though.
“The thesis that the underlying value of a retailer lies in the real estate that it possesses … is kind of bogus. The appraised value is worthless without a buyer on the other side willing to write a check,” Columbia’s Cohen said, adding that mall-based, retail real estate is “hurting very badly.”
It’s hard to know much about the value of Belk’s real estate – a spokeswoman did not return a request for comment.
Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates Inc., estimates that department store chains are worth 30 percent less than they were when the Belk deal was signed.
“The (retail) sector is horrendous. So, (Sycamore) bought into a bad sector and paid the top price,” Davidowitz said. “What’s not speculation is the value of Belk today, given the sector they are in, is dramatically less than when they did the deal.”
Shares of Simon Property Group, which owns shopping centers like SouthPark Mall and Charlotte Premium Outlets, fell more than 7.5 percent this week following the disappointing earnings releases from Macy’s, Kohl’s, Nordstrom’s and J.C. Penney.
How they got here
One of the big reasons traditional retailers are suffering is the rise in e-commerce – or as many industry watchers like to say, the Amazon Effect.
Belk has been building up its digital capabilities in recent years, but it was relatively late to the e-commerce scene: Until late 2008, its website offered only gift cards, gift registries and a small selection of home goods. And the site, overloaded with high volume, went down for hours over Black Friday and Thanksgiving in 2013, some of the year’s busiest shopping days.
Customers shopping online generally are looking for specific items and aren’t subject to impulse purchases the way they would be when shopping in a physical store, said Richard Jaffe, an analyst at Stifel. And that can be a challenge for traditional stores.
“E-commerce has fueled a secular change in apparel consumption; undermining total fashion apparel consumption and eroding profitability,” Jaffe said in a research note this week.
Another challenge for department stores: Younger consumers have different purchasing patterns than their parents. Young people, already burdened by student loans and smaller salaries, are opting to spend on experiences like concerts and technology like smartphones, rather than on clothes, industry experts say.
“The normative behavior of younger customers is not fixated on trend purchasing, at least not in apparel and accessories,” Columbia’s Cohen said. “They have to have the latest iPhone, but not the latest sweater.”