An offer J. Jill can’t refuse?

Quincy, MA-based women’s apparel cataloger/retailer J. Jill Group continues to play hard to get from the advances of New York-based apparel merchant Liz Claiborne. But some industry mavens believe that Liz Claiborne’s offer of $366 million for the company may be too good for J. Jill’s management to pass up.

Representatives of J. Jill and Liz Claiborne would not comment. After making its first unsolicited bid to buy J. Jill more than two years ago, Claiborne tried again last March. In a letter to J. Jill’s board of directors, Claiborne chairman Paul Charron said that the price was attractive and that the purchase would be a chance “to reinvigorate J. Jill’s well-regarded but underperforming brand.” On Dec. 15, Claiborne signed a confidentiality agreement with J. Jill to help it work through its options. It’s no secret which option Claiborne is shooting for.

On Nov. 18, Claiborne had offered $18 a share, 41% better than J. Jill’s $12.79 per share closing price on Nov. 17. J. Jill’s management “will be under pressure not to abandon a sale given the 41% premium in their stock price offered here,” says David Solomon, managing director at New York-based investment bank Goldsmith Agio Helms. “Management could have shareholder revolt if they don’t follow through.”

In need of a hand

An alternate buyer could come in and close at some higher level through an auction process if J. Jill rebuffs all offers. But Solomon, for one, thinks that scenario is unlikely. Although J. Jill’s sales have risen during the past few years, from $347.6 million in fiscal 2002 to $434.9 million in 2004, much of that was due to its retail expansion. In 2004 combined catalog/Internet sales were $191.0 million, down almost 5%, from $200.2 million in 2003, on a 2% cut in circulation.

And for the nine months ended Sept. 24, J. Jill posted a net loss of $1.5 million on sales of $318.8 million. For the comparable period of 2004, the company had reported net income of $6.1 million on sales of $315.4 million. (At press time, however, J. Jill had raised its fourth-quarter profit outlook citing better-than-expected holiday sales.)

J. Jill, which began as DM Management in 1987, was for years a high flyer. In 1999 the company started to expand its reach through a retail rollout. But the company suffered growing pains as it worked to hone its multichannel strategy. In a a statement accompanying its third-quarter 2005 results, president/CEO Gordon Cooke was blunt: “Our overall business continues to be disappointing. Net sales in our retail segment are growing primarily as a result of opening more stores… Simply put, our modest top-line growth is insufficient to support desired levels of profitability — the increases in costs associated with supporting a larger infrastructure are currently outpacing our sales growth. This situation is being further exacerbated by the fact that our less profitable retail business is growing while our more profitable direct business is declining.”

Some believe that in addition to its rapid retail rollout, J. Jill’s woes also stem from a merchandise strategy that needs refocusing. If the acquisition is approved, Claiborne could provide product improvements, especially in design capabilities and quality, says Solomon.

And, notes Claire Gruppo, president of New York-based investment bank Gruppo, Levey & Co., the $4.63 billion Claiborne could provide J. Jill will significant merchandising and manufacturing might.

In addition to its title brand, Claiborne includes apparel brands, including Dana Buchman, Juicy Couture, and Sigrid Olsen. It operates 269 specialty stores and 622 concession stores (stores within another retailer’s stores). “We could expect to see Jill expand its direct business with new titles aimed at a younger demographic that Liz understands,” Solomon says.

Conversely, says Gruppo, “Liz Claiborne will use the J. Jill retail stores to distribute their own proprietary merchandise and lessen Claiborne’s dependence on department store distribution. This deal is about diversification.”

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