Wal-Mart Acquires ModCloth Online, A Women's Specialty Retailer

| About: Wal-Mart Stores, (WMT)

Summary

Walmart's e-commerce division has acquired ModCloth for an undisclosed sum.

ModCloth is a web-first women's apparel and accessory retailer.

The deal is along the lines of recent Walmart acquisitions to bolster its e-commerce efforts in the face of Amazon's competitive challenge.

Quick Take

Retail giant Walmart (WMT) announced that it has acquired the assets and operations of ModCloth for an undisclosed amount.

ModCloth had created an inclusive online-first women’s fashion aimed at 18 to 35-year-olds of all body sizes and lifestyles.

The deal is similar to other recent moves by Walmart to acquire web-based apparel retailers to spur growth and improve its Ecommerce operations in the face of the onslaught by Amazon (AMZN).

Target Company

San Francisco-based ModCloth was founded in 2002 by Eric Koger and Susan Gregg Koger to provide women’s clothing, accessories and décor via its online website and a single retail store located in Austin, Texas.

The company is headed by CEO Matthew Kaness, who joined the firm in January 2015 and was previously Chief Strategy Officer at Urban Outfitters.

Below is a sample video by the company showing its ‘edgy’, fashion-forward sense:

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(Source: ModCloth)

The company raised $78.7 million in equity and debt funding. Investors included top firms such as Accel Partners, Norwest Venture Partners, First Round Capital and Floodgate.

Acquisition Terms, Rationale and Commentary

Financial terms of the transaction were not disclosed by the companies, although according to a report in TechCrunch, Walmart indicated ‘it was an all-cash acquisition that was ‘along the same lines’ as its two previous deals for ShoeBuy ($70 million) and Moosejaw ($51 million).’

If true, that would signal a poor investment for ModCloth’s VC firm backers, who may have just recouped their original capital investments at most.

The ModCloth unit will continue to operate as a standalone business with its existing 300-plus employees and CEO Kaness under Walmart’s Ecommerce retail group, headed by Jet.com founder Marc Lore.

As part of the deal, Walmart has extended its now-standard invitation to ModCloth’s designers and vendors to expand their consumer reach by having ‘the opportunity to serve more customers through Jet.com and our other e-commerce sites.’

ModCloth’s approach to ecommerce was to appeal to the 18 – 35-year-old female segment by providing ‘unique designed and exclusive fashion.’

Management fostered a community-based effort that was focused on inclusive outreach to women of all sizes and lifestyles, promoting body positivity outlooks. Most of the products are offered in a full-size range.

This deal seems to be typical of late by the Ecommerce group within Walmart in that it is focused on apparel, which the company believes is the fastest growing segment for Ecommerce.

Furthermore, ModCloth was apparently facing a capital shortage as its venture debt may have been coming due without investor support to pay it off.

In the ensuing uncertainty, Walmart’s Lore stepped in the opportunistically acquire the company and its younger demographic clientele.

One question will be whether Walmart will effectively be able to monetize the investment by retaining those younger customers.

As long as ModCloth operates as a standalone entity for the near term, customers should largely remain as they won’t see any real change.

In return, Walmart gains another differentiated Ecommerce offering from which to learn and adapt to its other ecommerce efforts to combat challenger Amazon in the fiercely competitive online retail space.

ModCloth’s current revenues are not material to Walmart, rather it’s the knowledge that these new, niche online-first retailers can bring to the incumbent that it prizes.

Time will tell if Walmart can reap the benefits from that strategy.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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