PE Firm TowerBrook Seeks To Spinoff Women's Clothing Store, J.Jill, In Upcoming IPO
Summary
PE Firm, TowerBrook Capital Partners, acquired J.Jill (JILL) in May 2015 and is now seeking to spin off the company through an IPO, expected to take place on Thursday (3/9). The company plans to raise $175M through its offers of 11.7M shares at a marketed price range of $14 to $16.
All shares are being sold by company insiders and therefore the company will not receive proceeds from the sale. The company has an additional 1.75 million shares over-allotted for its underwriters. If J.Jill prices at the midpoint of its price range, it would command a market cap valuation of $656M.
The underwriters for the offering include: BofA Merrill Lynch, Morgan Stanley, Jefferies, Deutsche Bank Securities, RBC Capital Markets, UBS Investment Bank, Wells Fargo Securities, Cowen and Company, Macquarie Capital and SunTrust Robinson Humphrey.
Business overview
J.Jill Inc. is a national women's apparel manufacturer that is focused on affluent women ages 40 to 65. The company offers both direct and retail sales through its multiple sales channels. Direct and retail channels represent 42% and 58% of net sales respectively. It sells its clothing through its catalog, website and in retail stores. The company has 275 stores in 43 states and is based in Quincy-MA.
J.Jill previously traded as a public company until it was bought by Talbots in February 2014 for $517M. The company operated as a wholly-owned subsidiary of Talbots until it was acquired by PE firm Golden Gate Capital for $75M in 2009. Six years later, the company was acquired by PE firm TowerBrook Capital Partners in May 2015 for $400M.
Executive management overview
Paula Bennett has served as the president of J.Jill since Jan. 2008 and as the chief executive officer since July 2009. She has more than 35 years of experience in retail management as well as experience in marketing, buying, apparel merchandising and brand building. She has previously served as the chief executive officer of a number of different companies of the Orchard Brands Corporation. Earlier, she served as the vice president of retail sales at Calvin Klein Corporation. She completed her undergraduate education at the Ohio State University.
David Biese has served as the chief financial officer and as a senior vice president of J.Jill since Aug. 2009. Prior to that, he served as the senior vice president of merchandise operations for Trans World Entertainment Corporation and as a vice president of finance before that. Biese completed his undergraduate degree at the University of Wisconsin at Oshkosh and is a certified public accountant.
Financial highlights, risks and use of proceeds
J.Jill has shown impressive revenue growth; the company generated net sales of $562M in 2016, up 16.3% from $483M in 2015. Between 2012 to 2016, J.Jill grew net sales at a CAGR of 9 percent, much faster than the industry average. Net income was $14.2M and $10.2M for the years 2016 and 2015, respectively. For the year 2016, the company reported gross margin of 66.4% and operating margin of 7.4%, which are in-line with retailer's average.
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As a result of the leverage taken on through past acquisitions, the company has total debt of $274M and paid 16.8M in interest expense in 2016; approximately, 3% of net sales. Although high debt is to be expected in companies taken private by PE firms, the high interest expense is eating into the company's net profits and adds risk for investors.
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(S-1/A Filing)
Competition
Women's apparel is a highly competitive industry. The company competes with international, national and regional retailers, online brands, and catalog marketers. Top competitors include: Eileen Fisher Inc., Nordstrom Inc. (NYSE:JWN), J. Crew, The Talbots, Inc. and The Gap Inc. (NYSE:GPS). If JILL prices at the midpoint of its price range, it would trade at a price/sales multiple of 1.07x. This is slightly below the industry average of 1.55x price to sales. (see below)
JILL |
Industry Avg. |
|
Market Cap |
656M |
8.75B |
Price/Sales |
1.07x |
1.55x |
Gross Margin |
66.4% |
36.61% |
Operating Margin |
7.4% |
12.02% |
Conclusion: Consider Passing On This IPO At This Time
J.Jill has a strong customer base and has shown terrific growth. However, its substantial debt and poor liquidity make us hesitant on investing. In addition, the fact the shares are being offered 100% by company insiders is another reason that gives us pause and could undermine confidence in the IPO.
We suggest investors pass on the IPO.
If we hear of the deal's growing popularity this week, we could become interested in the IPO as a short-term trade.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JILL over the next 72 hours.
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