Marc Miller Offers a Peek Into the Inner Workings of SPARC
SPARC is a case study in successful evolution. Originally created by Simon Property Group and Authentic Brands Group as a lifeline to fight empty storefronts in the real estate developer’s malls around the country, the company has grown into a profitable operator of five well-known brands that account for more than $4 billion in sales in the U.S. alone: Aéropostale, Nautica, Lucky Brand, Forever 21 and Brooks Brothers.
In fact, David Simon, chief executive officer of Simon Property, boasted on an earnings call in the fall that since the brands were acquired at below-market prices because of their troubles, they will result in “a significant return on our investment” and ultimately add more than $1 billion to Simon’s bottom line.
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But within the industry, the ownership and operating structure of SPARC is still a bit of a mystery. Marc Miller, a 16-year veteran of Aéropostale who came to SPARC as part of the $243.3 million purchase of the retailer out of bankruptcy a little over four years ago, was elevated to CEO of SPARC less than two years later.
In an interview, Miller succinctly laid out the history of SPARC and its goals for growth in the future, at its existing brands and those that meet the criteria for being added to the portfolio.
“SPARC started with the joint venture between Simon malls and Authentic Brands Group when they came together to buy the assets of Aéropostale out of bankruptcy in 2016,” Miller explained. “Essentially the idea was to take what was Aéropostale, an integrated specialty retailer, and break it into two component parts: one being the intellectual property, the trademarks — which was held in a company called Ipco, which is under the domain of ABG — and an operating company that performed any of the services that a vertical retailer would: everything from product design and merchandising, to sourcing, supply chain, marketing and running stores and e-commerce as well as back-office functions.”
In the beginning, the company was called Aero OpCo, “not the sexiest name, but over time we changed the name to Simon Properties Authentic Retail Concepts. That’s what SPARC is,” Miller said.
Once that platform was established, he said, Simon and ABG quickly realized that SPARC “could be independently profitable,” and began looking for other brands where it could leverage this newly created expertise.
“I always believed that if we built a platform similar to ABG — with a strong foundation — that SPARC would be a world-leading enterprise that combines the best in retail, real estate, e-commerce, wholesale and brand.” “Marc has built a phenomenal team. Something that I really respect in a leader is the ability to surround themselves with other great leaders,” said Jamie Salter, CEO of ABG.
In 2018, VF Corp. put its Nautica division up for sale and SPARC management believed it was “a great brand with great potential. Not only did Nautica have retail stores and e-commerce in the U.S., it also had a big wholesale operation, so that was a new capability that we acquired,” Miller said. The purchase price was not disclosed, but represented ABG’s largest acquisition at that time.
Miller said once Nautica was purchased, SPARC followed the same game plan, separating the intellectual property and putting that under ABG’s control, while the day-to-day operations of the brand would be run by the SPARC team.
But it wasn’t until 2020 that SPARC shifted into overdrive. In February, it made a deal to acquire Forever 21, the bankrupt fast-fashion retailer, for $81.1 million. That was followed in August by the purchase of Lucky Brand out of Chapter 11 for $140.1 million. And in its highest-profile acquisition to date, in the same month, it purchased Brooks Brothers, which was also operating in bankruptcy, for $325 million.
As the operator of these five brands, Miller said SPARC controls businesses that “collectively generate over $4 billion in sales — and that’s just in the U.S.”
Miller explained that while his company “sets the product direction, runs the day-to-day marketing, the stores, e-commerce and is responsible for wholesale sales, two primary functions remain in the intellectual property company, which is under ABG’s control, and that’s overall brand management — so things like halo marketing for the brands — as well as establishing licensed relationships outside of SPARC.”
For example, if an interested party wants to operate Forever 21 stores in the U.K., he said, that deal would be cut with ABG. “They would likely utilize the line we’re producing in the U.S. and buy from it, but that licensing relationship is managed by ABG.”
Simon, although a full 50-50 owner in SPARC, serves more as a “strategic investor,” Miller said. “Of course, they have a number of stores for the five brands in their malls and in that, we have a direct relationship, but beyond that, Simon doesn’t play a day-to-day role in SPARC.”
In the company’s third-quarter earnings call in November, David Simon described the SPARC platform as “a winning formula. We’re very pleased with the progress we’ve made in such a short period of time. One day, we’re going to make $1 billion-plus on that investment without question. ABG has been a very good partner. They know how to blow out the license aspect of it, we get out of bad stores. We buy the inventory at a discount. We right-size the overhead, and we operate with better business judgment. And lo and behold, you suddenly have a business that’s got significant positive EBITDA [earnings before interest, taxes, depreciation and amortization, and you haven’t paid much for it. SPARC is a rent payer to Simon Property Group, so we get the added benefit of the cash flow from running the business operationally.”
In the beginning, Brookfield Properties, another mall developer, was part of the mix. Miller explained that Brookfield was the “smallest partner” in the Aeropostale deal with Simon and ABG, but sold its stake to the remaining partners. In the Forever 21 deal, ABG and Simon each purchased 37.5 percent of the brand while Brookfield had a 25 percent stake. Miller revealed that a few weeks ago, Simon and ABG bought Brookfield out and now own that brand together.
Just to muddy the waters further, Simon and Brookfield teamed up to buy J.C. Penney Co. Inc. last year, but SPARC is not involved and ABG has no equity stake in that deal, Miller explained.
With that as the backdrop, Miller said looking ahead, the plan for SPARC is to grow the five brands it already owns while searching for other, complementary companies to add to the fold.
“The go-forward plan is successfully integrating the three acquisitions that we did in the past year — that we’re well on our way to doing — and resetting them for success in the future,” he said.
Aéropostale is obviously furthest along that road, but opportunities still exist for the retailer. “Aéropostale has done a wonderful job rebuilding its brand and connecting with Gen Z,” Miller said. “The store business is very healthy and the e-commerce is growing but still underpenetrated, so we see plenty of white space when we benchmark ourselves against other specialty competitors. Our penetration isn’t as high to our total business, so we see big opportunities there.”
Miller said the goal is for e-commerce to eventually reach 30 percent of sales, he said, adding that sales in that channel increased 50 percent last year.
For some e-commerce advice, Aero can look to its new sister brand, Forever 21, for guidance since that brand has developed an e-commerce business that represents nearly $500 million in sales.
In addition, SPARC plans to test the wholesale waters with Aéropostale. The business actually started as a men’s private label within Macy’s in 1983, “so we will test the appetite for Aéropostale with select wholesale partners,” he said. ABG will also explore taking Aéropostale beyond U.S. borders. “We don’t have as much of a presence yet, but we’re starting to,” Miller said, pointing to Europe and parts of Asia as prime regions for expansion.
Turning to Nautica, Miller said while the brand has historically had a disproportionately large wholesale business, its direct-to-consumer sales nearly tripled last year. “We’re seeing great appetite for Nautica, particularly online,” he said.
In addition, the brand’s small women’s business is gaining momentum. “We’re starting to see sell-throughs and increased penetration as we put some resources into the women’s side of the business, both in our owned channels as well as with select retail partners who are testing the women’s line in their stores.”
At Forever 21, which Miller said has “always had a fairly dominant position with fast-fashion for teens,” SPARC sees the opportunity to bring that expertise to other countries around the world. Although the business had “a pretty robust international profile” under its previous owners, many of those stores closed. “But we’re starting to replace those with licensed operators in those same markets. We see a big opportunity to grow Forever 21 internationally and also test the possibility of wholesale with select partners,” he said. The brand operates in 26 countries outside the U.S. with growth in Europe significant.
For Lucky Brand, Miller said the goal is to expand the silhouettes and fabrics available in its premium denim offering while bringing in “complementary fashions that work with denim.” That includes a bit of the popular athleisure category, “but not too much because it’s not really part of the brand story.” In addition, SPARC will work to build on Lucky’s “very strong wholesale strategy” by seeking out potential partners in that channel.
Finally, there’s Brooks Brothers.
Miller said the plan is to build on the brand’s “incredible heritage” and “augment” its historic strength in tailored clothing by increasing its penetration of sportswear — moves supported by the appointment of Michael Bastian as creative director. “We’re starting to see the first trickles of his product into stores, which is very exciting, and there will be a fuller rollout for fall,” Miller said.
Women’s wear is seen as another growth vehicle. “Brooks, similar to Nautica, has been almost exclusively men’s, but we see some opportunities to build out the women’s business and reset the vision,” he said.
Other opportunities include exploring the wholesale market as well as categories such as uniforms for airlines and other companies. “There’s lots of upside,” he said.
As CEO, Miller oversees all five franchises, but reporting to him are Ken Ohashi, CEO of Brooks Brothers; Daniel Kulle, CEO of Forever 21, and Natalie Levy, president and chief merchandising officer of Aero, Nautica and Lucky.
Operationally, there are dedicated teams at each brand for design, merchandising, marketing and planning. But there are overall heads of retail store operations, wholesale and e-commerce that service all banners and can benefit from the synergies of a larger organization. “This is particularly important in e-commerce where we’re trying to build one vertical stack that will support each of the five brands with common functionality on the front end and key vendor relationships.”
Miller also set the record straight regarding the relationship with Simon. He said that although the developer is a partner in SPARC, less than 50 percent of the brands’ stores are in Simon malls.
“We play in every major mall in the U.S., and there’s not one restriction whatsoever,” he said. “They want to see these brands meet their ultimate potential and it’s important that the brands be able to meet each consumer’s need wherever they want to shop. That means being in all the great malls in the U.S. regardless of the mall operator. It’s not even a topic of conversation.”
Looking into the future, Miller said he expects SPARC to purchase additional brands for the portfolio. But they have to meet certain criteria.
“We’re always on the lookout for great brands. There are plenty of brands that are available, but we’re very selective in the ones we look at: they not only have to have global potential, but they also have to have potential for turnaround or at least expansion in the U.S.,” he said. “They have to have a defensible market position where we can add the skills and expertise we already have within our SPARC team to unlock growth and value.”
With the success that SPARC has experienced, does Miller see the business as a model for other companies to save brands and businesses on the brink of extinction?
He responded: “’Save’ is a strong word. I think there’s innovation in our business model and one thing that we demonstrated is that you can unlock value by separating the IP from the operations. And you can grow and achieve synergies at brands that for different reasons have fallen on harder times recently but they’re still great brands that may have been underinvested in, or were victims of COVID-19 or other retail shakeouts. But I don’t see us as the saver of brands; I see us as the custodian and purchasers of great brands with untapped potential.”
