When Boston-based Berkshire Partners purchased children’s clothier Carter’s Inc. in August 2001, the private equity firm’s dealmakers rightly predicted it would be a moneymaker. Carter’s floated 7.2 million shares on the New York Stock Exchange on Oct. 24, at an opening cost of $19 per share. By the end of the day, the share price had risen $5.65, closing at $24.65, a 30% increase. As of press time, the stock was trading at $28. Carter’s trades under the symbol “CRI.”
While Berkshire retained a 70% stake in Carter’s, the float is the rarest of exits these days-the initial public offering. “We filed the S-1 during the summer of 2002, but only wanted to go out if we saw a reasonably healthy market,” said Ross Jones, a managing director with Berkshire. “Even though there aren’t a lot of big IPOs of late, there is certainly interest in good quality companies. Carter’s is easily understood, and has performed well in an economic period in which many [retail companies] faltered.”
Indeed, Carter’s experienced a 25% jump in net revenue from 2000 to 2002, and 2003’s first-half numbers indicate a similar jump over the first half of last year.
The offering was led by Goldman, Sachs & Co., with Banc of America Securities LLC, Credit Suisse First Boston and Morgan Stanley acting as co-managers.
Based on the first-day closing price and its 27.3 million shares outstanding, Carter’s is valued at roughly $675 million. Of the total 7.2 million shares offered in the IPO, 4.7 million were offered by the company, 1.6 million by Berkshire and an additional 940,000 by Goldman, which exercised its green shoe option-meaning the bank authorized the sale of additional shares because of the IPO’s popularity.
Carter’s intends to raise more than $100 million from the offering and use the net proceeds to pay off $61.3 million in junk bonds, but there will still be more than $230.7 million in outstanding debt leftover from the 2001 buyout.
In the 2001 purchase, Berkshire used roughly $150 million in equity to purchase Carter’s from Investcorp for a total purchase price of $450 million. “We knew we were getting a great brand and a great management team even though, at the time, the idea of investing in an apparel retailer was not in vogue,” said Jones. “But when we looked at the market they were servicing, we saw Carter’s as a consumer staple, and when we thought about the brand, we saw a number of opportunities to expand.”
Carter’s is currently the largest branded marketer of baby apparel in the U.S., based on revenue. During its 138 years of operations, Carter’s has expanded its operations to include 400 department stores and 159 Carter’s retail outlets. Jones lists three factors as major contributors to Carter’s overall marketplace growth during the past four years.
The first was to expand the age range served. “We call it from birth to bus’,” said Jones, in describing the retail company’s expansion that now includes clothing lines for children up to six years old. “Carter’s core product line covers the zero to two-year-olds market, and we have a significant market share, but we decided to venture into the two to six [year-old] market when we realized no single company held a share of the market larger than three percent.”
The second factor was creating two clothing lines in the discount market. Beginning in 2001, the Tykes brand started being sold in more than 1,100 Target stores in the U.S., while Child of Mine, a brand created in 2003 specifically for Wal-Mart stores, now appears in more than 2,900 of the mega-chain’s stores.
The third major factor is global outsourcing. “We continued Investcorp’s plan to shift manufacturing to lower-cost regions, including Latin America and Asia,” said Jones. “Beginning in 1999, the outsourcing lowered costs and increased product quality, flexibility and responsiveness in the supply chain.” The apparel sector has used cheaper, overseas labor for decades, but Jones said the strength of the Carter’s brands “allowed them to prosper without [moving offshore] until recently, but it was needed to remain competitive.”
According to Adrienne Tennant, a specialty retail analyst with Wedbush Morgan Securities, now is the right time to go public if you’re in the retail business. “Historically, on a five- and 10-year basis, retail tends to trade to a 15% to 30% discount to the S&P 500, but currently it’s trading flat or at a slight premium,” he said.
Tennant mentioned Aeropostale Inc., a Bear Stearns Merchant Banking portfolio company, as another retail company showing increased revenue. “The back-to-school sales are usually a good indicator of how a retail company will do for the holidays, and these guys have shown momentum,” she said. In July, Bear Stearns offered 6.5 million shares of Aeropostale to a favorable response by the public market. Tennant points to a conservative trend in retail clothing, with consumers shifting away from the fashion retailers and focusing more retailers such as The Gap, Abercrombie & Fitch and Urban Outfitters.