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ICR Day One: Supply Chain Issues and M&A

On the heels of what appears to have been a healthy holiday season, fashion and retail firms still remain concerned about supply chain disruptions. Some, however, are also looking further ahead to growth through mergers and acquisitions. These emerged as two key themes at Day One of the ICR Conference on Monday.

Supply chain

While company executives at Genesco Inc.—which operates the U.K. footwear retailer Schuh, the branded fashion footwear and accessories chain Journeys Shoes, and the upscale apparel and footwear retailer Johnston & Murphy, among other chains—spoke positively about the holiday season, they also noted post-holiday selling issues connected to supply chain disruptions.

Mimi Vaughn, CEO, said “stores were the story behind the holiday,” noting that consumers had an appetite for shopping in person, particularly in the days leading up to Christmas, when stores “were up 23 percent.” While online sales were down 10 percent versus a year ago, it was still “strong,” she said.

“There is no doubt we would have had even better sales if not for the supply chain,” Vaughn said.

She noted that the week between Christmas and New Year’s is typically a “big week of sales and returns,” but that “our inventory was so low that it was challenging for us to convert the return.”

Acknowledging that the company has been “chasing our way through the entire pandemic,” the CEO did emphasize that the company has an inventory opportunity ahead, plus some time to over the Chinese New Year to catch up and make some progress on port congestion. Apparel and footwear manufacturers typically get some breathing room over the Lunar New Year as factories shut down for a two-week period to allow workers time to head home to celebrate with their families.

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She also said the company isn’t worried about the possibility of oversupply: “First of all, I think the levels where we are in terms of inventory, it’s going to take some good amount of work for us to be able to get back to the levels of inventory that we would like to be at.”

Vaughn explained that its Johnston & Murphy brand was down more than 50 percent on inventory, so while product lines were selling, “I think we’ve got quite a long way to go before we worry about oversupply.”

CFO Tom George emphasized that the company would like to get higher inventory levels. “We know we’ve been missing some sales, and we’d like to restore those inventory levels,” he noted, adding that while he expects some progress on that in the third quarter, restoration of inventory levels will probably be more likely in the fourth quarter.

Executives at Five Below Inc. also spoke about supply chain issues, and detailed what their team did to get ahead of any potential delays over the holiday season.

As for product shortages, Five Below CEO Joel Anderson said “it was certainly less than expected. We’ve been working all year on bringing product is early. And that certainly paid off. They did arrive late. But we were able to quickly get it out of our distribution centers and into the stores and produced a great holiday season on top of last year.”

CFO Ken Bull described the team effort as “planful” and “proactive,” both of which helped the retailer get product needed for the holiday season.

“The team was again proactive in getting out ahead of locking up capacity and rates from a longer term perspective. So we sit today, having the majority of our inbound container racing capacity locked up. And for a longer term, we normally go for one year term, and we locked up for even longer than that,” Bull said.

As for port congestion, the CFO said the majority of goods are primarily shipped to the Eastern Seaboard. He noted that the company is not seeing any material changes in terms of congestion issues in the Gulf, and whatever delays there are at the L.A. and Long Beach ports on the West Coast involves a small amount of Five Below’s imports.

As for inventory position to start the year, Bull said the team has been working on accelerating receipts to “make sure they get in here and we’re in a good position to start the year off strong.”

At direct-to-consumer fashion platform A.K.A. Brands, CFO Ciaran Long noted that the fashion firm works with vendors from more than 14 countries, and the diversified base using a test-and-repeat data-driven model means “we work with vendors that are actually very agile and then they move pretty quickly with us.”

Long added that the company relies primarily on air freight, so didn’t get caught up with sea freight issues. “We brought some inventory in early for Q4 to be ready,” he said, noting that the thinking remained the same for Q1. “I think the overall model that we have is quite flexible and we can react quickly and move as we see change within the overall supply chain,” the CFO explained. A.K.A. in September raised $110 million in its initial public offering.

Tom C. Chubb, III, chairman and CEO of Oxford Industries, said during his company presentation that the firm is still working on diversifying its sourcing base away from China.

“I think through the pandemic, we’ve learned just the general value of having diversity in your supply base, and by that I mean not having all your eggs in one country basket. So over the coming years, our intent is to continue to diversify. We’d love to be at a point where you have no country that’s more than 25 percent of the total supply base,” he said.

Chubb said China’s still a little bigger than 25 percent in terms of current sourcing, and that the primary options that are of interest include Latin America, including Peru. The chairman went on to note that the company has along history of operating in a lot of different countries,” adding that in his 32-year tenure at Oxford, the company has done business in more than 60 countries. “The bottom line is that we can go wherever the opportunities are and will continue to do that,” the chairman said.

Mergers and acquisitions

The Oxford Industries chairman also said that the company’s portfolio approach allows it to share operational expertise and knowledge across its businesses and gives its a strong balance sheet, as well as “flexibility for strategic investments in well-defined brands.”

Chubb said Oxford is “always watching the M&A market for potential acquisition opportunities and we’re ready to act when those come along.”

Companies that do $150 million to $300 million or “maybe more in sales” would “really move the needle for us.” The chairman said those companies are “far and few between.” The company also considers smaller investments.

“We also love our emerging brands, which is where we can go into a smaller brand, maybe start with a minority investment of some type. If it works out. we like each other and are aligned on strategy and other issues, then we can potentially bring them into the portfolio and leverage our enterprise resources and knowledge to really accelerate [its] growth,” Chubb said, adding that the best example of this is The Beaufort Bonnet Co. “Going back five-and-a-half years ago, we gave them some capital for growth. And then four years ago, we actually bought them outright, and in that four years, they’ve grown from $7 million dollars to this year [where they be around] $30 million in sales.”

The A.K.A. Brands presentation also touched upon M/A opportunities.

“We have a really robust pipeline and our tracking literally 1000’s of brands and talking to hundreds [means] we do develop long-term relationships. I think that’s part of what differentiates our investment strategy [in that] we do really build an investment,” Jill Ramsey, CEO, said.

She explained that A.K.A. gets to know the brands and help support them as operators with ideas along the way. “We’re not just there with a checkbook, but we can actually really help these founders and these young brands realize their maximum potential and their aspirations for the brand. We are looking to continue to diversify our portfolio and enhance it. So as we add new brands, we look to diversify our demographic footprint, a different fashion, our geographic footprint,but we’re also opportunistic,” the CEO said.

Ramsey described the company’s portfolio as a strategy with a diverse range of demographic targets from age ranges to ethnicity. Company CFO Long said A.K.A.’s discipline approach to M&A includes putting the brands through a “funnel of expectations of high growth, profitability” and that the company isn’t the highest price bidder when it talks to brands. He added that if a company is looking for a purely financial transaction, then A.K.A. is not the right fit for them.

We’re really looking to bring on brands [with] good operating teams, enhance them and really grow the brands within the portfolio,” Long said, adding that the company is “looking for brands that are complementary from a category perspective, [one that’s] not in competition with what we have.”