Alloy Makes $50M Offer for Delia's
The boards of directors of both companies approved the agreement this week.
"It provides mass and scale as both a direct marketer and a retailer," Alloy CFO Sam Gradess said. "The most financially attractive piece is the synergies around combining the direct marketing businesses. The retail, we acknowledge, is more of a challenge, but we think [it] could serve as a growth platform for the combined businesses."
Alloy sells clothes and other items to female teens through a catalog and alloy.com, which also includes content of interest to its youth market. It also owns teen catalogs targeting boys interested in skateboarding and the BMX bike market.
"We have no physical locations prior to this transaction," Gradess said. "This gives us a franchise [of more than] 60 stores, eight of which are outlet stores. We anticipate that the retail operations will lose money."
Still, he said that by the "back half of next year we should see good profitability indicators on the retail side."
Delia's markets apparel, accessories and home furnishings to teen girls and young women through the Delia's catalog, www.delias.com and the retail stores.
Delia's faced delisting in May from the Nasdaq National Market. Its net sales fell from $143.7 million in fiscal 2001 to $137.6 million in fiscal 2002. Direct segment sales dropped 19 percent, partly from a decrease in catalog circulation and disappointing response to second-half catalog mailings and online offerings.
Alloy thinks the combined entity will produce a $300 million annual revenue base, a merged database exceeding 20 million names and a combination of revenue and cost synergies of $10 million to $15 million yearly.
Gradess said the company wants to maintain the identities of the Alloy and Delia's catalogs.
"The game plan is to bring the direct marketing operations together," he said. "[This] will allow us to be more strategic with respect to circulation management. It will mean being more productivity driven in managing the combined circulation. It could mean a reduction in circulation."
He also discussed "cross-pollinating" the database.
"There will be testing of the Alloy catalog into the unduplicated Delia's database and vice versa," he said. "There's roughly 50 percent crossover, meaning there's a lot of names to examine [with] both [targeting] young to middle teens -- 13-to-17 females."
And he mentioned opportunities to cut fulfillment costs.
"There are cost-savings opportunities in supplies, paper, printing and mailing," he said. "And we believe there is room to rationalize Delia's catalog costs in terms of reducing page count. They produce roughly 90 [pages per book], and there's an opportunity to take that to the upper 60s in a moderate, but ultimately productive, decision in improving per-page efficiency. Other opportunities include improvement in merchandise gross margins resulting from vendor leverage."
The deal was in the works "off and on for a couple of months," Gradess said. "They were looking to sell the business since October of last year."
The transaction is to close during Alloy's 2003 fiscal third quarter.
Headcount reductions are expected after the transition period that is to last "a few months." Gradess would not provide specifics.
Alloy has hired former J. Crew chief operating officer Walter Killough Jr. to serve as COO of the merchandise operations for Alloy and Delia's.
Delia's chairman/CEO Stephen I. Kahn "will be involved from a consulting perspective for a limited period of time, after which he will pursue other opportunities," Gradess said.