The Talbots Inc. will acquire cataloger and retailer The J. Jill Group Inc. for $517 million in cash.
Both brands have a strong presence in the women’s apparel arena, with a focus on customers over 35. Talbots also offers men’s and children’s apparel.
During third quarter 2005 — the most recent one for which information is available — J. Jill posted sales of $103 million, up from $94.9 million a year earlier. The company’s net loss widened slightly, from $2.66 million to $2.69 million.
J. Jill will continue to operate under its own name, and will keep its headquarters in Quincy, MA. The Talbots is based in Hingham, MA, which is roughly seven miles from J. Jill.
“When you take a look at the basic operations, J. Jill has had a tough time,” said Lee Helman, managing director at investment banking firm Gruppo, Levey & Co. “The catalog business has been shrinking, and the retail business hasn’t performed that well.”
According to J. Jill’s financial statements, retail operations are playing an ever-increasing part of the company’s fortunes. The company cut back catalog circulation from 17.4 million books in third-quarter 2004 to 12.1 million during the most recent quarter. During the nine months ended Sept. 24, it mailed out 40.6 million catalogs, compared with 52.8 million during the same period a year earlier.
J. Jill’s direct sales revenue reflects this cutback. For the quarter, direct sales fell from $42.1 million a year ago to $37.2 million. Within that, the Internet is playing a greater role: Online sales made up 45.9% of third-quarter 2005’s direct sales, compared with 43.2% a year earlier.
In contrast, the company operated 134 stores at the end of third-quarter 2004, and ran 170 as of the end of third quarter 2005. Retail sales — aided by the new store openings — increased from $51.4 million to $63.8 million.
But the direct segment generated a $7.3 million operating profit during the first nine months of fiscal 2005, compared with $144,000 in operating profit for the retail business.
There are several reasons why the acquisition is a good fit, said Helman. First, the J. Jill female customer is slightly younger and edgier than the typical Talbots shopper. This will allow Talbots to move into a consumer segment without having to create a new business from the ground up. And in J. Jill, Talbots has purchased a business in which the three main channels — catalog, retail and Internet — are already well integrated.
Second, there is room for economies of scale. “J. Jill had $105 million in selling, general and administrative expenses during the first nine months of fiscal 2005,” said Helman. “There won’t be $105 million in SGA in the first nine months of fiscal 2007.”
But the final piece of the puzzle is that Talbots must believe there is substantial growth for J. Jill to realize under the new management. The purchase price represents a multiple of 22 times EBITDA — an investment that doesn’t make sense unless Talbots plans to aggressively leverage its new property, said Helman.
“It is a grand slam if you are an owner of J. Jill stock, but it’s a price to choke on if you are anybody else,” said Helman. “It can’t just be about taking out costs. It’s about bringing together two great brands with strong customer service and different customer segments.”
In terms of direct marketing assets, J. Jill brings to Talbots a file of 1.8 million last-12-month buyers (up from 1.6 million a year ago), 813,000 J. Jill credit card holders (an increase from 676,000), and more than 1.2 million e-mail addresses (up from 1.1 million.), according to papers filed with the Securities and Exchange Commission.
The last-12-month buyers include both in-store and direct mail sold customers. A data card from Millard Group — which manages both the J. Jill and the Talbots files — lists 779,842 available mail-order buyers who have made a purchase within the last 12 months.
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