Jones Apparel Goes Upscale With Barneys

Jones Apparel Group is jumping into the luxury-retail market with its plan to acquire Barneys New York.Jones Apparel, a Bristol, Pa., clothing and shoe company, said yesterday it agreed to purchase New York-based Barneys for about $294.3 million in cash, or $19 per Barneys share, plus fund the repurchase of $106 million in Barneys debt.The deal, which is expected to close in December, would further Jones Apparel’s brand diversification but take it into the luxury segment for the first time. Jones Apparel expects the acquisition to add to its 2005 earnings.Since the late 1990’s, Jones Apparel has made a series of acquisitions, adding brands such as Nine West, Anne Klein, and Gloria Vanderbilt. The company originally focused on supplying women’s clothing to department stores but now also sells shoes and jewelry and operates its own retail stores.But the acquisition of Barneys, a Manhattan institution since the 1920s, takes Jones in a new direction. Barneys has three flagship stores – in New York, Chicago, and Beverly Hills, Calif. – plus 18 other locations.“When you think about where we are, it was an opportunity to enter into a segment that we currently have no exposure to, that does not in any way cannibalize our existing business,” Jones Apparel’s chief executive, Peter Boneparth, said on a conference call yesterday morning.Despite Barneys’s hallowed reputation among wealthy shoppers, the company has a checkered history over the last decade. It stumbled with an expansion plan in the 1990s and filed for bankruptcy protection in 1997. It emerged from bankruptcy proceedings with two primary investors, Bay Harbor Management LC and Whippoorwill Associates. Bay Harbor and Whippoorwill put Barneys on the sale block in the summer.Barneys sought a buyer partly to tap into the capital markets to finance its own store expansion. In 2001, it began opening Co-Op Barneys stores, which are aimed at younger shoppers. The company plans to open more Co-Op stores next year, and it also wants to open more Barneys flagship stores.“As you know, our competition has many, many flagship stores,” said Barneys’s chief executive, Howard Socol, who will continue to head Barneys. “We see the opportunity for more flagship stores happening very quickly, and in a very planned and properly laid-out program.”The deal may surprise some investors because Jones previously had no exposure to the luxury segment. What’s more, it gets Jones into the business of specialty retailing of other companies’ brands. Jones’s current retail stores mainly sell its own brands.Jones CEO, Mr. Boneparth, seemed to anticipate investor surprise with the deal yesterday by saying people might “not understand fully” at first blush.But he said consumer demand for luxury goods has increased, and Barneys is poised to further capitalize on that demand. Also, Mr. Boneparth said Jones had consulted with its major retail partners before launching its bid for Barneys.“We would not have competed against them in this particular property,” Mr. Boneparth said. “And I think it’s safe to say we believe there will be absolutely no negative ramifications to our purchases with our major retail accounts.”An analyst with Tradition Asiel Securities Inc., David Griffith, said Wall Street may “cast a dark eye upon” the deal because it’s a new direction for Jones.“When you buy Barneys, you’re buying a retailer of many different branded suppliers, some of whom you might view as competitors to Jones,” Mr. Griffith said.But Mr. Griffith said he sees very little overlap between products sold by Barneys and those made by Jones. He sees the deal as “mildly positive” for Jones Apparel and sees little risk.“The purchase price is well within their means and there’s certainly upside to it in the luxury market,” he said.The proposed purchase price values Barneys at about nine times Barneys’s earnings before interest, taxes, depreciation, and amortization in the 12 months ended July 31, said chief financial officer and chief operating officer for Jones Apparel, Wesley Card.Also, the deal values Barneys at about 0.9 times its sales in the year ended July 31. Barneys’s posted operating income of $32.8 million on $444.2 million in sales in the year ended July 31.Mr. Griffith estimated the deal values Barneys at less than eight times projected annual Ebitda. That’s largely in line with valuations for rival luxury retailers Nordstrom Inc. and Neiman Marcus Group Inc., Mr. Griffith said. Mr. Griffith doesn’t own Jones shares, and his firm has no investment-banking relationship with Jones. Mr. Card said Jones has a bank credit facility that could help finance the purchase of Barneys, but the company is exploring tapping into long-term debt to make the deal.Barneys shares, which trade on the OTC Bulletin Board, fell $1.21 to $18.84. Jones shares recently fell $1.18, or 3%, to $34.80, on volume of 1.1 million,above the daily average of 899,518.

Jones Apparel Goes Upscale With Barneys

Jones Apparel Goes Upscale With Barneys

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