Last week, Nordstrom Inc. (JWN) announced that it has completed the acquisition of Trunk Club, the provider of personalized clothing services for men, in an all-stock transaction of $350 million. Nordstrom had entered into an acquisition agreement with Trunk Club on Jul 31.
As per the agreement, Nordstrom has retained a portion of the agreed stock that will be vested in the future. Apart from this, Nordstrom has agreed to pay $100 million in the form of long-term management incentive which will be based on the company’s performance.
Furthermore, Nordstrom in its recently reported earnings for second-quarter fiscal 2014 revealed that the acquisition will be dilutive to its earnings per share for several years. This is mainly due to the issuance of shares and long-term performance incentives related to the Trunk Club acquisition along with amortization of certain intangibles. In fiscal 2014, it anticipates that the transaction will reduce its earnings per share by 3% to 5%.
Chicago-based Trunk Club was founded in 2009 by its current chief operating officer, Brian Spaly. Since its establishment, the company has registered significant growth in its business and expects revenues for 2014 to cross the $100 million mark. Trunk Club has showrooms in Chicago, Dallas and Washington and is planning to open its fourth showroom in Las Vegas. The company currently has over 500 employees of which 250 are professional stylists.
The company offers designer outfits for men on their style, fit and size preferences. To avail of this service, customers have to become a member, which is free of cost. Then the company’s stylists talk to interested members over the phone to inquire about their preferences. The company then sends a full box of items and customers are only charged for those which they choose not to return within 10 days.
We believe that the recent acquisition strategically fits Nordstrom’s business model. It not only enhances the company’s capability of serving male customers but also expands its online clothing services for men, in which it invested two years back by acquiring Bonobos.
Though Trunk Club has been growing significantly since its inception, it suffered from the lack of an inventory of branded items. However, upon joining forces with Nordstrom, it will have access to over 100 brands. Furthermore, we believe that Nordstrom’s 271 stores across 36 states and over 1,500 talented personal stylists will take Trunk Club’s business to a new high.
For the past few years, men’s clothing business has been growing by leaps and bounds, which has prompted many large retailers to enhance this segment’s square footage in stores as well as introduce luxury product lines for men. This explains why the acquisition of Trunk Club is important for Nordstrom’s growth.
Another significant acquisition in the men’s clothing business was that of Jos. A. Bank by The Men's Wearhouse, Inc. (MW) earlier this year.
Currently, Nordstrom carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry are Citi Trends, Inc. (CTRN) with a Zacks Rank #1 (Strong Buy) and Abercrombie & Fitch Co. (ANF) carrying a Zacks Rank #2 (Buy).