By Eric Single
Here’s a look at seven retail stocks that may catch the eye of companies hunting for acquisitions in the near future:
Specialty coffee maker Green Mountain Coffee Roasters (GMCR) has taken off on the strength of its Keurig Single-Cup Brewing System, an innovation that has become wildly popular due to its convenience in both at-home and away-from-home settings. GMCR acquired Keurig and its patented system for $104.3 million in 2006, and has seen its revenues jump from $225 million in the 2006 fiscal year to $1.357 billion in the 2010 fiscal year, with sales on pace to almost double that figure this year. According to the company’s recent third-quarter earnings report, sales of the Keurig system and its refill portion packs (“K-Cups”) accounted for around 82% of GMCR’s consolidated net sales this past quarter.
Since last year, GMCR has signed licensing deals to sell coffee refills under major U.S. coffee brands such as Smucker's Folgers (SJM), Starbucks (SBUX) and Dunkin' Brands Group's Dunkin' Donuts (DNKN). It wouldn’t be surprising if any of those three made a push to absorb the single-cup technology into its business structure via a buy-out.
Starbucks (SBUX) in particular would stand to benefit from control of the K-Cups as a supplement to its current share of the premium single-cup category, Starbucks Via Ready Brew, given the company’s aspirations of future growth in that area. The more Starbucks can deflect the impact of the potential shift in market share out of cafes and stores and into the home, the better chance it has to limit the effect of that shift on the revenues of its pervasive shop locations. With $1.45 billion in cash reported on its 2010 balance sheet (and a total market cap of $27.9 billion), Starbucks would probably have to issue additional equity in addition to debt to swallow GMCR’s market cap of $15 billion, but the coffee giant may see it as a necessary risk to try to stem the receding returns on its retail stores.
Seattle-based Blue Nile Inc. (NILE) is the leading online retailer of diamonds and fine jewelry. While NILE’s engagement ring offerings have typically driven sales, the company sees the other jewelry categories as major opportunities for growth, and the most recent quarter’s double-digit sales growth in the non-engagement category seems to confirm that outlook. The tendency of the luxury sector to recover more quickly than the rest of the retail industry combined with rising consumer interest in online retail indicates that NILE should be well positioned to continue its moderate revenue growth.
NILE’s market cap of $519.9 million would make it a relatively painless acquisition for several large companies with existing interests in luxury retail. Coach Inc. (COH) is the number one luxury accessories brand in the United States, a title owed in large part to the sale of its handbags. Jewelry sales accounted for less than 9% of Coach’s sales in the 2010 fiscal year, and the acquisition of a leading ring specialist could help strengthen one of the company’s less prominent offerings. Online retail giant Amazon.com Inc. (AMZN) also has the resources to assimilate Blue Nile into its current jewelry department, a move that would be expedited by the two companies’ similar value-centric philosophies. NILE hasn’t displayed close to the level of earnings that would qualify it for traditional purchase by the standards of Berkshire/Hathaway (BRK/A), who typically requires at least $75 million of pre-tax earnings, but we think the company’s online retail success could position NILE as a useful accessory to Berkshire’s existing Helzberg Diamonds unit.
Deckers Outdoor Corporation (DECK) designs, produces and markets footwear and accessories through six different brands, with UGG Australia far and away the most prominent among them. UGG boots, slippers and other casual sheepskin footwear accounted for 87% of DECK’s net sales in 2010, and the company’s ongoing task is to extend the brand’s popularity beyond merely seasonal fashion as well as to maintain the luxury brand appeal amid its expansion in popularity and increased demand. In July, DECK acquired the popular outdoor/adventure footwear brand Sanuk for $120 million in cash in a move that should give the company a firmer place in the surf and board sports market.
In UGG, new arrival Sanuk and outdoor footwear brand Teva (which accounted for 10% of net sales in 2010), DECK now offers three very visible brands that would be desirable additions to the footwear giants that can handle the company’s market cap of $3.3 billion. While V.F. Corporation (VFC) – owner of brands such as Wrangler, Reef and The North Face – would find some value in DECK’s top offerings, the apparel leader may have already made its big move with the recent acquisition of Timberland Company (TBL).
Nike Inc. (NKE) remains committed to breaking into the action sports market, and the acquisition of a brand like Sanuk could help dispel the worries of target consumers in that market that Nike is too mainstream, but I’m having trouble seeing how UGG fits into Nike’s overall strategy. With an established hold in the casual and dress shoe market as a result of its Rockport brand – not to mention a less intense philosophical commitment to athletic wear in North America – Adidas AG (ADDDF.PK) seems like a more viable candidate to smoothly incorporate UGG and the rest of DECK’s offerings. It’s not as large as Nike, but Adidas AG has enjoyed enough positive cash flow growth and retired enough debt recently – its net borrowings dropped from over 2 billion euros in the 2008 fiscal year to 221 million euros in 2010 – to take on a handful of valuable brands.
Nike may see a cheaper and more attractive target in Zumiez Inc. (ZUMZ), a specialty retailer of action sports-related apparel, footwear, equipment and accessories with a market cap of $577.9 million that owns over 400 stores in North America, primarily within shopping malls. Zumiez stores focus on a diverse collection of brands in order to quickly adjust to changing fashion trends among teenagers and young adults, and the company’s desire to bring the look and feel of an independent specialty shop to a mall setting parallels the greatest branding challenge facing Nike’s growth in the action sports market. The value of a Zumiez storefront could help advance Hurley, Nike’s primary action sports subsidiary since its acquisition in 2002, as well as the company’s Nike 6.0 action sports brand. With its large-scale sponsorship of the US Open of Surfing in early August, Nike continued its strong push to integrate itself into the genre.
Panera Bread Company (PNRA) operates and franchises bakery-cafes that feature organic and all-natural products extensively on the menu. The St. Louis-based company has a market cap of $3.2 billion and hopes its commitment to higher-quality products than typical fast food restaurants will lead to expansion of its brand on a national level – PNRA plans to open 100 to 105 new stores this year. PNRA experienced 14% total sales growth in 2010, signaling a return to its traditional growth numbers after reporting just 4% growth in 2009, and has also seen its operating margin and return on sales slightly outperform their three-year averages.
PNRA’s size may appear to narrow down the list of potential buyers to powerhouses such as McDonald’s Corporation (MCD) and Yum Brands, Inc. (YUM), but MCD has steadily distanced itself from its partner brands in recent years, and I can’t see Panera restaurants meshing with any of YUM’s current brands in the setting of the dual-storefront method commonly employed by the company.
Chipotle Mexican Grill, Inc. (CMG) has grown considerably since being spun off by McDonald’s in 2006, and with a market cap of $9.3 billion, it’s within reason that CMG could find a way to absorb another powerful fast-casual restaurant brand in Panera. The two companies share a philosophy predicated on fresh, high-quality ingredients, and both have recognized a substantial opportunity for growth in suburban markets. CMG has hardly any debt and would need to assume some in order to finance a potential acquisition of this size, but the synergy opportunities of the two like-minded restaurant chains could greatly benefit the expansion of both brands.
Buffalo Wild Wings Inc. (BWLD) owns, operates and franchises restaurants that offer both casual take-out and dine-in options and features a variety of items in addition to its signature chicken wings. Among sports bars, BWLD stands alone with its strong national advertising presence and held 732 restaurants in 44 states at the end of 2010. The company’s sales growth slowed to 14% in 2010, down from a 5-year average of 24%, but it has continued its expansion efforts, opening the company’s first international location in Toronto in May. An additional goal is to strengthen the company’s position in existing markets as a result of the company’s advertising push and current brand familiarity.
YUM created the WingStreet brand in 2003 as a delivery-based wing chain within many of its Pizza Hut restaurants – a result of the company’s multi-branding strategy designed to help eliminate the “veto vote” within a group of potential customers – and today the company has locations in over 2,200 Pizza Huts. The acquisition of BWLD could increase the value of WingStreet’s delivery service beyond the multi-branding concept and would give YUM a brand with some momentum in the chicken market to help offset Kentucky Fried Chicken’s underwhelming performance of late in the U.S. – KFC represents just three percent of YUM’s overall profits. YUM closed out 2010 with $1.4 billion in cash on its balance sheet, so if necessary it could acquire BWLD without incurring significant debt.
Hansen Natural Corporation (HANS) develops, markets, sells and distributes alternative beverage brands, with Monster Energy chief among the company’s holdings. Sales of Monster Energy brand drinks accounted for $484.4 million, or 92%, of the company’s record $527.5 million in gross sales from the second fiscal quarter. HANS has a market cap of $7.5 billion and is hoping to expand its international business in order to stimulate growth.
The two most logical potential buyers of HANS are the two giants of the beverage industry, The Coca-Cola Company (KO) and Pepsico, Inc. (PEP). Both companies have their own brands of energy drink playing catch-up to Monster Energy and Red Bull in the lucrative energy drink market – Amp Energy for PEP, Full Throttle for KO – and both companies closed the 2010 fiscal year with enough cash alone on their balance sheets to enact an acquisition with relative ease. KO’s sponsorship of the NHRA Full Throttle Drag Racing Series and past forays into music industry sponsorship indicate that it may be able to smoothly incorporate Monster’s intimate and long-standing relationship with many action sports stars and celebrities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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