Public or private? It’s a question that apparel retail company boards seem to be asking themselves with increased frequency these days. The answer, however, is anything but simple. Both types of ownership have their fans and detractors, as well as their benefits and disadvantages.
Going public is the tried and true way for founders and shareholders of rapidly growing privately-owned brands and retailers to cash in on their creativity, foresight and hard work. The promise of the pot of gold at the end of the rainbow is what keeps many an entrepreneur working day and night to be the next Sam Walton, Steve Jobs or Jeff Bezos. Michael Kors, for example, made hundreds of millions when his company went public in 2011.
Many retailers use the money raised in equity markets to finance growth by investing in technology, by acquiring other businesses, or by building new brick-and-mortar stores. Large retail companies like Walmart, TJX, Costco, Macy’s and others went public decades ago, when interest rates were much higher than they are now. Selling equity was the cheaper and simpler way to raise money, and retail market growth was healthy. It’s safe to say that these companies would not be where they are today without being public.
Staying private also has its advantages, however, and a successful private company can earn its owners plenty. Two years ago Spanx founder Sara Blakely, who still owns 100 percent of her underwear company, became, according to Forbes, the youngest self-made female billionaire at age 41.
Robin Lewis, co-author of “The New Rules of Retail” and editorial director of The Robin Report, feels quite strongly that most retailers should not be public companies. “It’s been my belief for a long time,” said Lewis, “that highly cyclical businesses like retailing–that are dependent on rapid response, seasonal changes, quickly changing product, fashion trends and random consumer behavior–should not be publicly held.”
Lewis believes that chasing short-term goals might force management of some of even the best-run public companies to make the wrong decisions. “One of the biggest threats to sustainable growth in public companies,” he said, “is the tendency to focus on making the ‘numbers’ every quarter, and leadership’s willingness to resort to short-term tactics that are most often deleterious to sustainable long term growth and the strategies required to achieve it — which are often opposite those for short-term numbers.”
Given retail’s current slow-growth, ultra-competitive environment plagued by sluggish consumer spending and declining store traffic, you’d think more companies would see things Lewis’s way. Such does not seem to be the case, however. Only 14 companies in the apparel, footwear and textile retail space made it to this year’s Forbes Private Companies list of the more than 220 U.S.-based private companies with annual sales of at least $2 billion. By contrast, there are more than twice that number of publicly-traded retail companies with at least $2 billion in sales in the U.S.
Michael Dart, partner in the private equity practice of consulting firm A.T. Kearney and co-author, with Lewis, of “The New Rules of Retail,” says that’s because “going public is an efficient way to raise capital needed for growth, and a lucrative way for founders to monetize their equity and to diversify financially. It also forces some discipline into the company’s business practices so that it can withstand Wall Street scrutiny.” However, Dart agrees with his co-author Lewis that the cyclicality and seasonality of retail make being public a difficult proposition for some retail companies finding themselves under pressure to deliver topline growth.
According to Allan Ellinger, co-founder and senior managing partner at consulting firm MMG, “Being public is a burden. Maintaining the staff to meet all the regulations, keep up the reporting, filings, communications with analysts requires a significant investment.” Ellinger feels that the reasons behind a company’s decision to be financed primarily through debt or equity usually revolve around company mission, corporate culture, and the overall health of the firm and its brands.
Many privately-held companies, like New Jersey-based Toys ‘R’ Us, prefer to not have to incur the cost and hassle of constantly answering to Wall Street. The seller of toys, apparel and other children’s products was the highest ranked retailer on the list, with $13.5 billion in sales last year, putting it in the number 21 spot overall for privately held companies. The retailer was founded in the late 70s, and spent many years as a publicly traded company. Eventually, however, with increasing pressure from Walmart and other big box stores who battled it out for seasonal toy market share, the company realized it was futile to try to convince Wall Street that Santa Claus only comes once a year.
Other companies stay private to keep business in the family. Levi Strauss & Co. is the third largest privately-owned retail apparel company in the country, with $4.61 billion in sales, and one of the oldest and most quintessentially American brands in the world. The company exists for the benefit of both its customers and the many descendents of Levi Strauss, particularly those in the the Haas family, who own stock in the company. And Belk Stores, at $4 billion in sales and the largest privately held traditional department store in the country (also family run), prefers to defend itself against the likes of Macy’s outside the spotlight of Wall Street.
Some companies prefer to remain private because of owner personality. Fast-fashion specialty retailer Forever 21, owned by a Los Angeles based Asian-American family, did a reported $3.7 billion in sales last year. Although the company is quiet about its strategies, vendors and financials, it did announce its intention to double its store count in the next three years. Might they decide to do an IPO? Don’t bet on it, since these owners seem to prefer operating under the radar.
MMG’s Ellinger points out that “The personality of the founder determines corporate culture. Often, how secretive or open he or she is plays a part in whether the company prefers to be public or private.”
Other companies stay private so they can maintain personal beliefs and values. Arts and crafts retailer Hobby Lobby was in the news a couple of weeks ago after the United States Supreme Court ruled that the owners of closely-held, profit-making corporations cannot be forced under the Affordable Care Act to provide their employees with certain kinds of contraceptives that offend their religious beliefs. For this reason, the Christian-owned company, whose mission statement contains religious references, will no doubt remain private for quite a long time.
An increasingly common event is when a struggling or undervalued retailer (that, ironically enough, probably made its founders lots of money when it went public) becomes acquired by private equity partners who subsequently use their financial and operational expertise to turn the business around.
A.T. Kearney’s Dart feels that in many cases, just getting the company away from the scrutiny of Wall Street is a first step toward rehabilitation. “Too often,” he said, “a public company finds that the value of its brand and of its stock become linked in the echo chamber of the public domain. Taking an underperforming company out of the spotlight is a great way to give it breathing room to do what it must to turn things around.”
When asked if J.C. Penney might have been more successful in its turnaround effort if it had been a private company, Dart said, “Unequivocally. The scrutiny that company was under on an almost daily basis put tremendous pressure on the transformation management was trying to achieve.”
The Sports Authority, which was taken private in 2006 by two private equity firms, decided to pursue that path. It decided the best way it could navigate the increasingly competitive space occupied by Dick’s, Cabela’s and other high profile retailers was to get out from under Wall Street’s microscope and execute its strategic and tactical plan as a privately held company.
Luxury retailer Neiman-Marcus Group, operator of Neiman-Marcus and Bergdorf Goodman, is the largest apparel retailer on the list, and occupies the 82nd spot overall for private U.S. companies. The company is now largely owned by Ares group, a private equity firm, and a large Canadian Pension fund.
Fabric and craft retailer Jo-Ann Stores was acquired by private equity firm Leonard Green in 2010 for $1.6 billion.
Michaels Stores, its turnaround complete, went public just after the list went to press. Burlington Coat Factory, which was public until 2006 when it was acquired by Bain Capital, apparently appeared in the Forbes list by mistake, because it went public again last October.
J.Crew Group, with $2.4 billion in revenues last year, was omitted from the Forbes list even though it was famously taken private in 2006 by Leonard Green and has been rumored to be considering another IPO.
With interest rates at near zero, company management teams and employees can do leveraged buyouts using very cheap money. With so many retailers suffering from declining mall traffic, slowing sales and the need to invest in technology, we might see more companies going private in the near future.
Which retailers might we see on next year’s list of big private companies? Beleaguered yogawear purveyor Lululemon and Baby Boomer fave Chico’s are among the many about whom rumors are swirling.
It’s safe to say, however, that there will never be a definitive answer to the public/private question. As long as there’s an opportunity to make a profit, both ownership types — and the practice of converting one to another – will continue.