NEW YORK (The Deal) -- The need for revenue growth may awaken retail M&A after a two-year slumber, and up-and-coming online players such as ripped jeans-and-stilettos purveyor Nasty Gal Inc. and eyewear seller Warby Parker could be in the sights of more traditional players.
M&A levels have been relatively flat in the retail sphere after hitting the peak in 2012, according to Alan Mustacchi, managing director at investment bank Dresner Partners.
"Retailers are not getting much growth in general on the top line," Mustacchi said, adding that they are looking "for anything that can help grow that top line."
He explained that while many industry players are contracting, they are simultaneously searching for growth opportunities. And they often find themselves at a crossroads when it comes to choosing between building an online platform themselves and acquiring one."A lot of brick-and-mortar retailers have found that they're great merchants [and] they're great retailers," Mustacchi said. "But e-commerce is a different story." (JWN - Get Report) which announced on July 31 that it will scoop up men's fashion retailer Trunk Club, marking the Seattle-based company's first major deal since 2011, which is when it added flash sale website HauteLook. Other major retailers, too, have gone the acquisition route to add more online sales. Target (TGT - Get Report) bought online beauty site DermStore Beauty Group in August 2013, while TJX Cos. (TJX - Get Report) acquired Internet retailer Sierra Trading Post in late 2012. Such acquisitions reflect an ongoing trend, namely that it's easier for large retailers to acquire businesses instead of trying to replicate them, according to David Hernand, a partner at Paul Hastings LLP who represented Nordstrom in both the Trunk Club and HauteLook deals. "We will continue to see significant acquisition opportunities involving emerging growth companies as they prove [their] innovative business models," Hernand added. (UA - Get Report) and North Face if it hits the block, according to Rose. Trumaker secured $1.9 million in financing only last summer from a team that included Venrock Associates and REE Ventures. Warby Parker, which does have brick-and-mortar locations, could also get a look, Rose said. The company allows users to order eyeglasses and sunglasses frames for free online for a home fitting. It secured venture capital funding last year from American Express Co. and J. Crew Group Inc. CEO Millard Drexler, as well as Thrive Capital and General Catalyst Partners. (URBN - Get Report), Abercrombie & Fitch (ANF - Get Report), Forever 21 and Hot Topic as potential suitors. To be an acquisition target to a strategic buyer, though, the retailer must prove that it has a customer base and demonstrate growth, Morgan explained, adding that once online fashion startups hit the $50 million mark in sales, the market could start eying them as potential targets. But Charles Smith, managing partner of boutique investment bank Pegasus Intellectual Capital Solutions LLC, said retail startups that cater to men tend to be easier acquisition targets than those that serve women. "Getting your measurement is relatively simple," Smith said, in reference to services provided by J. Hilburn and Trumaker. "That can be done online." He explained that glasses, too, are products that could be sold relatively easily in the web sphere, but that women's fashion products tend to be more difficult to sell online. Officials from J.Hilburn, Trumaker, Warby Parker and Nasty Gal couldn't be reached Monday.
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