Valuations & Acquisitions: Tough Time to Compete, Worse Time to Sell

It must be a sign of the times when even a profitable catalog business can’t sell.

That was Sportif USA CEO John Kirsch’s position when I caught up with him just before Thanksgiving. He’d just put the Waterfronts Nautical catalog on the selling block. And as he aimed to sell the 21-year-old nautical-themed apparel catalog started by his father, Kirsch reflected on some hard lessons.

The economic crisis has turned all markets upside down. There were times Kirsch thought a buyer might materialize, but those deals fell through. Needless to say, these times require patience.

Kirsch’s father, John Sr., began by selling tennis shorts from the back of the family’s station wagon. He gradually built a reputation for quality, innovative outdoor and sports apparel. Today, the $15 million Sportif USA includes the Aventura, Sportif and Waterfronts Nautical catalog businesses.

Growth by Division
The parent company includes two wholesale divisions: a men’s division that designs and contract-manufactures the Sportif and W65 lines of men’s casual nautical/coastal clothing, and a women’s division that designs and contract-manufactures the Aventura Clothing line of “eco-friendly” women’s casual clothing and accessories.

“We needed to focus our limited resources — namely, capital and people — behind Aventura,” Kirsch says. “It’s growing 30 percent a year and has been profitable since its launch four years ago.”

In a strange sense, Kirsch’s decision to sell the title in the midst of the worst economy since the Great Depression is appropriate. Good timing has always eluded Waterfronts Nautical — which accounts for about 35 percent of the parent company’s sales — like eight years ago when it was about to unveil a major merchandise launch and Sept. 11 happened.

Bad Timing
“After 9/11, our sales fell off 60 percent for fall 2001,” Kirsch recalls. “We couldn’t have picked a worse time for that launch.”

Of course, the entire industry was affected by Sept. 11, not just Waterfronts Nautical. So too was Waterfronts a victim of postal rate hikes — at a time when it was ratchetting up circulation. From 2005 through 2008, the company’s combined printing, postage and in-the-mail costs increased 25 percent.

Recent sales haven’t been good for the still profitable Waterfronts Nautical. In 2007, net sales were $5 million with more than 50 percent of circ going to prospects. Last year ended at about $4 million in net sales due to reduced prospecting. In 2009, Kirsch anticipates the business will shrink to $3.5 million with only 20 percent of circ going to prospects. “But we will be profitable,” he insists.

So what’s the moral of the story? “The most important mistake we made was to serve such a narrow customer group — men’s apparel,” Kirsch says. “Women control more than 80 percent of the household discretionary income.”

When household budgets fall, purchases of men’s apparel dry up. As Kirsch describes it, the woman of the house rationalizes: “He has dozens of pairs of the same Chino pants or Oxford shirts, and they all look the same. He doesn’t really need anything.” On the other hand, he says, “she continues to buy for herself.”

For greater value going forward, Kirsch’s lesson is, “Whatever you do, make the foundation of your business entity to serve the female consumer first.”

Who’s Going to Buy It?
There’s some good news, however, for Kirsch, and it’s perhaps an early indication that lending is loosening and activity increasing. Some “strategic operators,” as Kirsch calls them, are reviewing the Waterfronts business. But even without a buyer, Kirsch has no plans to fold the title.

“Our biggest failure was not pulling prospecting back aggressively or quickly enough,” he says. “The housefile continues to perform very well. And despite our goal of divesting Waterfronts Nautical to the right strategic buyer, we’ll continue to operate the catalog/Web division of Sportif for the foreseeable future even if we don’t find a buyer.”

To borrow a timely solution, if Waterfronts Nautical doesn’t sell, perhaps Kirsch can request a bailout. At least the catalog business is profitable, and that’s a lot more than you can say for any of the Detroit automakers.

Mark Del Franco has covered catalog/multichannel mergers and valuations for more than a decade. You can reach him at mark.delfranco@yahoo.com.