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QUESTROM TURNS TO NEXT QUEST: DEB SHOPS

By Maura K. Ammenheuser

Even if it ain’t broke, there can still be plenty to fix. And juniors fashion chain Deb Shops, recently acquired by Lee Equity Partners, is now headed by one of the biggest fixers in the retail business, Allen Questrom, a senior adviser at Lee.

Questrom’s reputation as a turnaround king comes from his overhauls of the likes of JCPenney and Barneys New York. Now Questrom is nonexecutive chairman of Philadelphia-based Deb, a value-priced, 337-store chain, though his involvement is no sign of Deb’s needing a rescue per se, according to some.

“It’s not that they were in trouble, but they weren’t growing,” said Robert K. Passikoff, president of New York City-based Brand Keys, a consumer research firm.

“We do not view this as a turnaround at all,” said Collins Ward, an associate at New York City-based Lee, the private investment firm that announced its $395 million acquisition of Deb Shops in July. At press time the deal was set to close by Oct. 31.

Most of the chain’s stores operate in malls under the Deb name, and four are called Tops ’N Bottoms and sell men’s and women’s items. The shops operate in 42 states but are concentrated in the East and the Midwest. Nearly 200 of the stores sell plus-size merchandise as well as standard sizes. Further, the company operates two CSO outlets.

Deb was founded in 1932 as a hosiery company. When it went public in 1983, it was operating 106 stores. By the mid-1990s the chain operated nearly 400. Deb struggled with merchandising for some years before regaining its footing and its profits. The Lee acquisition takes the company private again.

Deb’s longtime leaders, CEO and President Marvin Rounick and Executive Vice President Warren Weiner, are nearing retirement age and sought a buyer, says Ward. The two will remain with Deb as consultants for three years. As nonexecutive chairman, Questrom will head the search for a new CEO and advise future management.

Lee sees great potential in Deb because it does well with its core demographic and geographic markets, says Ward. “And the plus-size offering caters to a market that’s underserved,” Ward said. The core customers are juniors, but the chain serves ages 12 through 25.

“Their stores are very profitable,” said Erin Moloney, senior vice president of equity research at Merriman Curhan Ford & Co., a San Francisco-based investment firm. Deb could easily have three times as many stores, says Moloney. Lee will probably be aggressive about growing Deb and then go public again, Moloney speculates.

Ward sees things differently. “I don’t think there’s going to be anything we’ll be very aggressive about at the outset,” Ward said. Eventually, however, Lee will open more stores selling the regular and plus sizes, which require about 8,000 square feet, says Ward. The stores without the plus sizes measure about 6,000 square feet.

According to SEC filings, for the first half of fiscal 2008 (ended in July), Deb’s net sales rose 2.8 percent, to $161.5 million, year on year. Gross profit reached $53.1 million, up from $51.4 million, while gross margin was up slightly, to 32.9 percent, from 32.7 percent. The company posted $127 million in cash on hand and no debt. Same-store sales slipped 0.1 percent for the half, versus a 0.8 percent slide a year previously.

The value-fashion strategy, together with plus-size offerings, is behind the chain’s loyal following, sources say.

Deb is a place for “middle market” teens to buy fashionable clothes, says John Bemis, executive vice president and director of leasing at Jones Lang LaSalle Retail, which has about 17 Deb shops in its portfolio. Recent items on Deb’s Web site, for example, included dresses going for $29.99 to $59.99 and shoes selling for between $19.99 and $22.99.

Most Deb stores are in enclosed malls, but Ward says future stores will be in malls and open-air centers. “They run their business very well,” Bemis said. This efficiency gives Deb healthy margins in a setting where sloppier operators might struggle. Additionally, Deb has a reputation for avoiding pricey real estate, preferring less-than-optimal mall spaces, says Moloney. “Their customer is a mall rat,” said Moloney. “She’s hanging out at the mall anyway.” That’s why this shopper knows Deb even when it’s not in center court, Moloney says. But Deb does take prime space in secondary markets, and secondary space in top markets, says Bemis. “They survive by picking their real estate carefully. … They offer enough value to the customer that their customer will seek them out.”

Ward did not respond directly to the suggestion that Deb favors cheap real estate. “The company has proven the ability to operate in a wide range of real estate,” he said. “We will continue to be flexible in terms of real estate. We’re researching and looking at opening stores in a variety of formats.” Those would include lifestyle centers, he says.

Still more Deb stores will be opened in the Northeast and Midwest, says Ward, but Lee also plans to expand in the South and the West, where the chain barely has a presence today. And the company will continue a push into clothes for overweight people. “It’s a brilliant move,” said Bemis. “The plus-size market in the U.S. is now 40 percent of the junior and missy market, but in the average mall, by no means do you see 40 percent of retailers serving that customer.”

Bensalem, Pa.-based Charming Shoppes operates three chains with plus-size fashion, but its stores are not aimed exclusively at juniors. Torrid and Hot Topic are the only retailers targeting overweight teens, says Moloney. Otherwise, larger customers typically buy clothing through general merchandisers or department stores — JCPenney, Kohl’s, Target, Wal-Mart.

Passikoff wonders whether size-6 teen-age girls will shop a boutique that shifts even partially to plus sizes, but Bemis thinks they will if the merchandising is right. They can coexist wherever standard and larger sizes are mixed and presented well, with plus sizes not displayed in a “glaring” way, says Bemis.

Regardless of size, discount fashion retail is a tricky business, though, says Passikoff, and Deb needs some sizzle in the long term to set itself apart from the likes of Wal-Mart and Penney. Ward bridles at the “discount” label and prefers to describe Deb’s wares as “value-priced fashionable apparel.” Sources describe Deb in equal measure as a discounter and a “value” business. Either way, Deb needs to give the brand some meaning beyond inexpensive prom dresses and catering to the plump, says Passikoff, though he concedes that these have benefited the chain. Deb might also consider aligning with designers, as Target has, or even creating a new brand, he says.

Bemis says he hopes Lee will open more Deb stores in new markets, such as the Southeast. And both he and Moloney say the stores need a makeover. “Lee will hopefully dedicate the capital to the brand to start a heavy renovation cycle to their existing stores and roll out the next generation of stores,” said Bemis. The older stores need updating to make them less spare and more stylish, he says. Deb would gain from looking more like Charlotte Russe or Forever 21 — more polished and yet not outrageously expensive.

Regardless of the specific improvements, sources expect Lee to expand and strengthen Deb and then sell. Ward says Lee is not looking for instant profit, though he would not say how long the firm expects to own Deb. “We don’t view this as a short-term investment.”