Exit of the Year: New York & Co. –

In 1996 the Limited undertook a bold initiative to rebrand and revitalize its Lerner Shops subsidiary. The retailer started tearing down the faded Lerner signs in front of its stores, replacing them with New York & Co. beacons; the in-house store design underwent a drastic makeover; the merchandise was tinkered with; and the management at Lerner was supplanted with new leadership to usher in the new era. The company even invoked the Patti LaBelle song, “A New Attitude,” in a 1996 press release. (Bold indeed, but if they wanted to stick with the Patti LaBelle theme, “I’m Still Waiting” would have been more prescient.)

In 2002, when the Limited finally abandoned Lerner and put the unit up for sale, it had been almost six years into the makeover, and the once bold ambitions sat stagnating. The most progress came in the form of store closings, with over 410 in all, and of those that weren’t shuttered, less than half had followed through in replacing the Lerner signage with New York & Co. signs. Amid the identity crisis, the company’s operating income in the last three and a half years of the Limited’s ownership fell from $28.5 million in 1999, to $4.31 million the next year, to $3.83 million in 2001. Lerner finally limped to a loss of $809,000 for the first 10 months of 2002.

While nobody wants to blame the Limited for Lerner’s poor performance, the company clearly did little to foster growth for the 80+ year-old retailer. Victoria’s Secret, Bath & Body Works and Express received much of the Limited’s attention, and when it came to doling out prime properties in the mall, Lerner ostensibly played fourth fiddle at best to its corporate siblings, and was usually given a dark corner in which to reside.

Enter Bear Stearns Merchant Banking. The firm has seen success in the retail space in the past, and its investment in Aeropostale was the stuff legends are made of. The firm parlayed a $6 million investment in the company into $476.6 million. That’s a return multiple of just a shade under 80x the firm’s equity.

There are some striking similarities between Aeropostale and Lerner: Both are corporate orphans, employ a low-cost, high inventory-turnover strategy and target the female consumer. Naturally Bear Stearns took a shot.

“It was very similar to Aeropostale,” Bear Stearns Senior Managing Director Bodil Arlander describes. “Neither were getting much attention from their corporate parents, and management in both cases was not receiving the necessary funds to build the business. They did not feel empowered to make decisions to help the business grow.”

Bear paid $153.5 million for Lerner, which included $78.5 million in cash, a $75 million subordinated note and warrants to the Limited for 15% of the common equity in the new business.

Right off the bat, Bear installed an incentive program for management and immediately put $5 million in working capital toward replacing all of the remaining Lerner signs. From there, control was handed over, and according to Arlander, “[The firm] just made sure management had the capital and the backing to go ahead and try new things.”

“They’ve been very supportive partners,” New York & Co. CEO and Chairman Richard Crystal tells Buyouts. “They give us insight in areas where they can add value and stay away when they don’t think they can [add worth].”

Crystal was hired to run Lerner in 1996, the year the company embarked on its makeover, but it wasn’t until Bear came into the picture that he was freed up to really move the business forward. “I was always pretty confident about this business. Their timing was right, and they provided the capital to allow us to move the business forward,” he said. “Retail tends to scare a lot of people and [Bear Stearns] was able to recognize the value here.”

Since the acquisition, New York & Co.’s fortunes have climbed steadily. The company continued to prune out the unprofitable stores, but under Bear, New York & Co. replaced those with outlets in more appealling real estate locations. Additionally, New York & Co. has followed through on its floor redesign, and has even made an effort to expand more aggressively into the accessories market, a ploy that has differentiated the retailer from others in its niche while also providing a promising path for future growth. In a sign of how things have changed at the company, New York & Co. even launched its first television marketing campaign, in which Donald Trump acted as pitchman in spots seen in the New York area.

Under the new initiative, growth quickly followed. The company’s operating income surged to $55.5 million in 2003 from a loss of $641,000 in 2002, when Bear first acquired the company. Buoyed by this forward momentum, Bear Stearns was able to orchestrate a dividend recap, and soon after that saw fit to float New York & Co. in an initial public offering, an exit Bear did not even think would present itself for the retailer.

“I remember very clearly thinking that this was not going to be a public candidate,” Arlander says, adding, “We didn’t even know that there would be logical strategic buyers for the company.” She describes that the firm originally thought New York & Co. would be best suited for a recapitalization exit.

New York & Co. ultimately underwent two recapitalizations, which allowed the company buy back the warrants that were held by the limited, while Bear Stearns took out a combined $69 million dividend. Through this, its stake in the company actually grew.

This past October, the firm floated the business on the New York Stock Exchange in a $170 million IPO that saw the stock rise 12% from its offering price on its first day of trading. Bear, meanwhile, recouped roughly $46 million more from the IPO, and the buyout shop now holds a 75% stake, valued at almost $700 million based on the current stock price. For the firm, the exit means a roughly 12x return on paper from its two-year, $63.5 million investment. (Also, as an added bonus for the buyout group’s parent, Bear Stearns’ investment bank teamed up with J.P. Morgan Chase & Co. to co-lead the IPO and got a share of the fees from the offering).

While the investment already qualifies as an unmitigated success, Bear is anticipating that when all is said and done, the firm will realize even more in profits, as the company continues to push forward on its makeover. “If you look at the store base, there is still a lot of room to grow,” Arlander says.

The analysts that cover New York & Co. stock tend to agree. Piper Jaffray, for one, has the stock rated as a “market outperform” based on the analyst’s belief that “New York & Co. is positioned to gain share amid a competitive women’s apparel retailing environment.” The analyst note adds, “Moreover, we note that new store productivity is running about 140% to the store base average -a positive indicator, in our view, as the company re-accelerates store openings.”

Meanwhile, taking a cue from Sy Spurling, Arlander now regularly shops at New York & Co., and she has seen first hand an improvement in the product. “In the past I didn’t shop there, but since I’ve been exposed to the company, I find the clothes very comfortable… I recently bought two tweed jackets, and I was at Barney’s the other day and the department manager there mistook one of the sweaters for a Chanel.”