Peculiar Happenings in the Retail Sector

 |  Includes: BJ, JAS, JCG, SHLD, URBN
by: Wall Street Strategies

by Brian Sozzi

The peculiar happenings in the retail sector have truly ratcheted higher in the last six months. BJ's Wholesale (NYSE:BJ) is fending off buyout advances from a major shareholder (Leonard Green). Jo-Ann Stores (NYSE:JAS) is on the verge of being removed from the public's eyes, thanks to a significant premium paid by, you guessed it, Leonard Green. How can one forget J Crew (JCG), which put into motion a much criticized $3 billion transaction with TPG and Leonard Green in the back half of 2010.

The odd happenings continue to swirl. Bloomberg reported that Sears (yes, you read that correctly...Sears (NASDAQ:SHLD)) and Urban Outfitters (NASDAQ:URBN) are weighing potential bids for J Crew. While history suggests we can't rule anything out when a company becomes fixated on a target, I would be surprised if Urban Outfitters makes a bid for J Crew, and think Sears runs the risk of losing Mickey Drexler and his team if it tries to scoop up the accessible luxury retailer (I just can't imagine J Crew in shops inside a Sears anchor location).

Seeing as we have coverage on Urban Outfitters, I will take a brief moment to outline why a deal is unlikely to occur. However, I do note that in a wild set of circumstances, if J Crew does join forces with Urban Outfitters, it will give the eclectic retailer a higher income customer base (less college kid more 25-35 year old), more mall-based stores, and greater leverage over suppliers at a time of input inflation.

Why this is looking like a no-go:

* Significant balance sheet leverage required.

* Consumer spending lines are blurred; a person buying a sweater at J Crew may steal a sale from Urban Outfitters or Anthropologie (whose assortment mirrors J Crew's).

* J Crew does not offer Urban Outfitters international exposure. Urban is actively expanding into Europe, and is keen on entering the Far East by 2012-2013.

* Urban Outfitters has an affinity for developing its own brands.

* J Crew is a lower ROA business, and the addition would jeopardize Urban's long-term 20% operating margin target.