The two men buying your favourite retailers

It has been a prolonged period of retail carnage: storied names declaring bankruptcy, mass market brands closing thousands of stores, tens of thousands of shop employees furloughed or laid off, garment workers in dire straits. More ominous still are the predictions that we will never shop the same way again.

For Jamie Salter and David Simon, however, it has been a time of great opportunity.

Salter is the founder and chief executive of the Authentic Brands Group, a company known for buying the intellectual property of famous brands at discount prices and then striking licensing deals with other companies that want to stick those well-known names on their products. Simon is the chief executive of the Simon Property Group, the largest mall operator in the United States with more than 100 properties. Together, they are reshaping the American retail landscape.

Last week, they closed a deal to buy the bankrupt Brooks Brothers, the 202-year-old American fashion brand and retailer, for $325 million. Last month, they acquired Lucky Brand denim, and in February, they bought Forever 21.

Together, the acquisitions will bring the global revenue generated by the company’s brands — a sprawling mix that includes Sports Illustrated and rights tied to Marilyn Monroe’s likeness — to $15 billion annually. And Salter is hunting for more.

“Look, if the world ends, which I don’t think it’s going to, then there’s no doubt about it, I’m not so smart,” Salter, a 57-year-old Toronto native, said in a phone interview. “But I don’t believe the world’s going to end.”

“Last year, we said within five years, we want to be at $20 billion,” he added, referring to the overall revenue generated from brands owned or jointly owned by Authentic Brands. “Another two to three deals could get us there.”

Many of the acquisitions are being made through a joint venture with Simon called SPARC, for Simon Properties Authentic Retail Concepts. Its roots go back to 2016, but it was created in its present form in January as a vehicle that turned out to be almost perfectly positioned to take advantage of the current state of the industry.

By teaming up, Simon, a press-averse Indianapolis real estate scion who declined to comment for this article, gets assurance that bankrupt chains and other tenants will remain in his shopping centres, while Salter gets a friendly landlord for his brands at a time when rent costs are crushing retailers, plus the chance to earn money by licensing the well-known names. Together, they own and operate 1,500 stores through their deals, which sometimes include Brookfield Properties, another mall giant.

Jamie Salter, the chief executive of the Authentic Brands Group, a company known for buying the intellectual property of famous brands at discount prices, at his home in Toronto on Aug 29, 2020. The New York Times

The purchase of Brooks Brothers, where layoff notices have already started going out, has put a spotlight on this arrangement — and invited new scrutiny. Supporters say SPARC is saving the businesses it’s buying. Critics say it’s simply exploiting their traumas for fast profits in ways that cheapen the brands’ legacies. They say the SPARC strategy treats brands and stores less like hothouses of creativity that need careful tending, and more like chess pieces to be moved around for maximum, if momentary, gain.

That suspicion has been hard to shake for Salter. Authentic Brands’ purchase of the Sports Illustrated brand last year is viewed as a prime example of the company’s bottom-line approach to licensing. It sold the rights to operate the magazine and website to another company, which gutted the staff, while simultaneously putting the Sports Illustrated name on protein powder, CBD cream and swimsuits. And Authentic Brands’ purchase of Barneys New York’s intellectual property last year was fiercely contested by a group of investors who waged a “Save Barneys” social media campaign to avert liquidations and the licensing of the name, painting Salter as a villain who sought to dismantle a cultural institution.

“It’s not a long-term quality play,” said one retail executive who asked not to be identified because the executive had been approached about the Brooks Brothers deal. “It’s not about a love of the brand or the goods. It’s predatory and opportunistic.”

Understanding Authentic Brands’ business is crucial to understanding the tides of retail today.

The company, founded by Salter in 2010, bets on famous names in fashion and entertainment, often buying their intellectual property with the aim of striking licensing deals with those who want to use the brand names internationally or on new products. Authentic Brands tends to earn an estimated 4% to 6% in royalties through this model.

“History,” was one of the answers Salter gave when asked what he looks for in a brand. “Does it have good archives we can bring back, because the world repeats itself all the time. The longer the history, the better.” The potential to cut costs was another.

For years, Salter led a division of Hilco, a financial firm, as it snapped up the intellectual property of bankrupt retailers like Sharper Image. While the retailer’s stores closed, Hilco was involved with deals that put Sharper Image’s name on products like garment steamers that were cheaper than wares at the original retailer and then sold in chains like Bed Bath & Beyond.

At Authentic Brands, Salter pulled off an early coup by acquiring the exclusive rights tied to Monroe, whose likeness drew the interest of everyone from Dolce & Gabbana to Walmart. His stable of 50 brands now includes Juicy Couture, Elvis Presley, Muhammad Ali and Frederick’s of Hollywood.

The Juicy acquisition in 2013, where Salter bought the brand but couldn’t secure its locations, made him realize the value of physical stores. Losing the stores, he said, hurt Juicy. “I can tell you unequivocally it’s easier to build brands with a retail footprint — touch, feel, try on,” he said.

Though Authentic Brands does not own the types of luxury retailers and labels as European conglomerates like Kering and LVMH, Salter said that LVMH served as “inspiration” and that they shared “similar ambitions.” He thinks of his company, where his four sons are also among the 200 employees (his eldest, Corey, is chief operating officer) as a family enterprise despite a roster of investors including BlackRock, Leonard Green & Partners and General Atlantic. The biggest individual investor after Salter, whose family owns about 20%, is Shaquille O’Neal, whose brand is managed by the Authentic Brands. Salter said that he has considered an initial public offering of stock but that the company has plenty of money and he doesn’t want to exit.

“Other people do want in,” he said. But, he added, “It’s a lot easier when you have two guys, and if there’s a problem, you pick up the phone and work it out in 10 minutes.”

Simon Property also holds about 7% after an investment in January, when it also increased its interest in SPARC to 50%, according to filings.

Four years ago, Salter said, “David came to me and said, ‘Why do you always close the stores when you buy the company?’ ” Salter replied that he was too nervous to operate the stores, worrying that the leases could become too expensive. Simon proposed teaming up with Brookfield to buy Aéropostale, which led to the formation of a venture called Aero OpCo Salter owned 20%, and Brookfield and Simon the rest. (Brookfield, which is not part of SPARC, declined to comment.)

The mall operators wanted their tenants to stay and ideally resume making money. They were also interested in Salter’s marketing prowess and his brands, which they figured could turn into stores at their malls.

“At the beginning, Simon just wanted ‘get my rent,’” Salter said. “But we started turning profits very quickly, and it started to be about building a business.”

Each side benefits. Salter’s brands have “variable rent” contracts with Simon’s malls, meaning their rent goes up and down with their sales and, in a lucrative arrangement, most don’t have minimums. Simon also receives a percentage of royalties from sales associated with the brand names. In January, Salter bought out Brookfield’s interest and the venture was renamed SPARC.

“COVID is a good lesson for all of us because thank God we had percentage rent,” Salter said. “We furloughed whatever number we had to furlough in Forever 21, and you’re only paying rent on a percentage of sales. It hurts a lot less.”

Still, some analysts say it isn’t good to see mall operators buying their own tenants out of bankruptcy at this pace.

There may be few options. As long as large retailers or hedge funds are unwilling to buy bankrupt chains like J.C. Penney, which could ultimately liquidate, “mall owners are the only viable acquirers,” analysts at Coresight Research, an advisory and research firm, wrote in a recent note. The firm estimated that 20,000 to 25,000 US retail stores would close this year, and at least 50% are mall-based.

“Acquiring retailers raises questions about mall owners’ long-term viability,” they wrote. “Mall owners cannot buy every anchor retailer in their malls, and often they will have to let stores fail instead of propping them up,” the analysts wrote.

Simon bristled on a recent earnings call at the notion that he was buying retailers for rent. “We believe in the brand and we think we can make money,” he said. He compared critics of the venture to those who told Amazon to remain in the book business.

Still, rent is no small concern. In filings, Forever 21, a top tenant at Brookfield and Simon malls in the year before its bankruptcy, said the aggregate occupancy cost for its stores was $450 million annually. Lucky listed $66 million in rent and occupancy costs last year. Brooks Brothers said its 187 store leases and other corporate property leases cost about $86 million a year. On top of that, there are co-tenancy agreements, which can allow other tenants to break leases or demand rent reductions based on vacancy rates or the exit of certain retailers.

“I do believe that the strategy by Simon and Brookfield is to protect their co-tenancy in a lot of cases, but I think it’s a Band-Aid,” said Jackie Levy, chief business officer of Caruso, the real estate firm that owns California open-air shopping centres like the Grove. “It might solve the immediate issue of keeping some of their smaller retailers or shops in the malls, but long-term, those leases are going to expire at some point and there’s going to be a flight to quality.”

For his part, Salter sees opportunities to meld the brands that go beyond reducing corporate staff and sharing e-commerce capabilities. He can imagine, for example, Brooks Brothers teaming up with Spyder to make performance outerwear, and with Volcom for swim trunks. Saks Fifth Avenue still plans to introduce Barneys New York shops within its New York flagship and Connecticut stores.

“If I could buy anything, I’d buy Reebok,” he said. “Hanna Barbera. I like the Flintstones, Yogi Bear. Got big ideas for Yogi Bear. I love the Jetsons. They should be the delivery system for Amazon. Just call the Jetsons, they’ll deliver it to you in two seconds!”

Though Salter said he wasn’t joining a bid by Simon and Brookfield for J C Penney, he can envision pursuing a similar chain in the future.

“There’s no doubt about it that Jamie Salter’s dream is to have an ABG department store,” Salter said. “And as David Simon says, maybe one day you’ll have your own mall.”

c.2020 The New York Times Company