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Goldman: Retailers need to be surgical in pruning their high margin products as well as real estate footprint mix

In the fifth and final installment of this multi-part miniseries, Goldman Sachs’ head of retail investment banking, Jen Davis explains that retailers need maximize their core capabilities in growth areas – and do not be afraid to be discriminatory on the product. For example, VF Corporation, the US-based global apparel and footwear company, spun off its traditional denim brands, Lee and Wrangler, into a separate company, called Kontoor Brands, in order to focus on its remaining higher growth brands focused on the active outdoor and work spaces, such as Vans, Timberland and The North Face.

Davis explains:

“For a company like the VF, they saw denim and the brands that they owned as slower growth, lower margin. And so, for them, from a shareholder perspective, to separate the higher growth, higher margin from the lower growth, lower margin was very helpful and additive to shareholder value.

Another example is Gap which has spun off Old Navy, separating long-standing sister brands including Banana Republic, Athleta brands, as well as Gap itself. The rationale, explains Davis, was that Old Navy is a more distinct value brand than the others.

“Management teams are thinking holistically about where they can add the most value and how, from a shareholder perspective, they can deliver the most upside for their investors,” said Davis.

The brands, and retailers, which have suffered most in recent years tend to be those which have failed, among other things, in adapting to technology progress.

Davis says:

“We’ve all seen the headlines of the retail bankruptcies that have happened over the past several years, whether it’s Toys ‘R’ Us, Gymboree, Mattress Firm, Payless, Claire’s; for a lot of private equity players who put a lot of money to work in this sector it’s been a very difficult investment strategy overall.”

Private equity investment has been more successful in less Amazon risk sectors, such as high growth restaurant brands, smaller growth companies where there is a feasible international growth play, and in ‘going upstream’, supporting multiple brands at the logistics level without taking that end-market risk.

Davis explains:

“A good example of that is Cornell Capital, who bought a company called KDC last fall, which basically manufactures the packaging for beauty brands. And so rather than picking what is the next hot beauty brands, they work with hundreds of brands, and basically provide the packaging back office supply chain and so forth for all of those brands.”

Davis was speaking Goldman’s Jake Siewert, in the firm’s latest Exchanges at Goldman Sachs podcast.

james.wallace@realassetmedia.com