SKM Growth Investors (SKMGI), Saunders Karp & Megrue’s private equity arm, is on the verge of making its first exit. The Dallas-based firm has entered into an agreement to sell Hat World Corp. to Genesco Inc., a retailer of footwear and accessories with more than 1,000 locations. Upon the successful closing, the transaction will return SKMGI’s investors approximately 4.5x their invested capital in just over two-and-a-half years. The transaction has been approved by the boards of directors of Genesco and Hat World. The closing, which is subject to regulatory approval, is expected by April 30.
Under the agreement, Genesco would acquire Hat World for a total purchase price of $165 million, subject to adjustments for debt, working capital and certain tax benefits.
Founded in 1995 by entrepreneurs Glenn Campbell and Scott Molander, Hat World has grown by micro-merchandising its stores to appeal to regional demand.
Under SKM’s watch, Hat World made moves toward expansion. After making its investment in spring 2001, Hat World hired current CEO Bob Dennis, previously head of the North American Retail Practice of management consulting firm McKinsey & Co., and purchased Lids, another hat retailer. While the two companies still operate under separate names, one management team runs them both.
“Prior to making our investment we knew the company and its position. We quickly bought 264 Lids stores out of bankruptcy and did a growth capital round to pay off a bridge loan,” said Barron Fletcher, a managing director with SKMGI. “Then we worked with the CEO and the management of Hat World to help them with an ambitious plan of integrating this large universe of stores and to systemize their approach to managing the growth of the company.”
One of SKMGI’s major focuses was looking at the new real estate opportunities. “We went through a period of about a year, after our investment and the acquisition of Lids, where there were no new lease commitments. We worked to engineer their approach to picking new locations,” said Fletcher. “Owning their biggest competitor certainly helped. Before, landlords would pit them against each other and jack up the rent prices.”
Fletcher said during the “no-new- lease” time, SKMGI forced the company to spend more time looking at demographics and data analysis when picking stores. “We really spent time looking at where the successful and unsuccessful stores were located. Once we started opening stores again in 2002 we opened 25 new units and in 2003 we opened about 45 units,” said Fletcher. The company is on track to open 45 to 55 new stores this year.
As a result of Hat World’s success, SKMGI decide now was the time to sell the company. “We concluded as a board that based on the company’s performance and the improving M&A market it was time to sell it,” said Fletcher.
The fact that youth spend much of their money on sneakers and hat apparel gave Genesco good reason to marry the two companies. “They really saw it as a strong fit,” said Fletcher.