New York & Co pushes back against activist investor

Dive Brief:

Women’s apparel retailer New York & Company, Inc. on Thursday pushed back in response to a Schedule 13D letter filed Wednesday with the Securities and Exchange Commission by activist investor Kanen Wealth Management LLC. In a statement, the retailer defended its strategic plan and stated that it is “committed to delivering value for all shareholders, and will continue to take actions to achieve this objective.”
The letter, written by Dave Kanen, president and portfolio manager for Kanen Wealth Management, LLC and Philotimo Fund, L.P, demanded the retailer appoint a new, independent director, saying he sent the letter “to highlight the losing record of the board of directors and company management.” The filing also reads: “We want to formally express our view that the results of the company and the share price have been awful. The status quo is unacceptable; only a few people at the top are benefiting from representation, while minority shareholders are suffering at the bottom.”
In March, New York & Co. reported results that met the high end of its forecast for 2016. Fiscal year net sales were $929.1 million down from $950.1 million in 2015. 2016 same-store fell 0.7%, compared to 2015’s 3.1% increase. The year’s adjusted net loss was $11.6 million, or 18 cents per diluted share, compared to the previous year’s adjusted net loss of $2.3 million or 4 cents per diluted share.

Dive Insight:

Founded in 1918 and public since 2004, New York City-based New York & Co. runs 466 retail stores in the U.S. Like many specialty apparel retailers, the company has run into headwinds of late: The retailer closed 11 flagship stores and six stores during the fourth quarter.

But it’s not highly leveraged: the company ended the year with $88.4 million of cash on-hand and no outstanding borrowings under its revolving credit facility. Inventories saw a double-digit decline in 2016 compared to the previous year, and the retailer has initiated cost reductions as part of its Project Excellence turnaround effort.

The retailer is turning to celebrities to amp up its profile, with attention to women of color interested in its casual apparel and work wear staples. The company this year tapped BET “Being Mary Jane” star Gabrielle Union to be a style ambassador, and Union will release a namesake collection in August. Union joins actor/model Eva Mendes, who has worked on a fashion series with New York & Co. since 2015. Those efforts were hailed by Kanen as positives.

“In a rapidly changing retail environment, our fourth quarter results met the high-end of the updated outlook we issued in January and included a double-digit increase in e-commerce sales, strong results in our Eva Mendes Collection, and expansion in overall gross profit margin despite mall traffic declines that lowered sales,” CEO Gregory Scott said in a statement in March. “The year was highlighted by significant progress toward our four key initiatives that we believe position New York & Company to improve its traffic trend through growth in celebrity and sub-brands that are exclusive to us, the expansion of our loyalty program and the introduction of marketing events that resonate more closely with our consumer demographic.”

Kanen criticized the company's cost-saving measures, however, saying they did little for the bottom line, and complained that private talks with the company have come to nothing. In addition to a new independent board member, the investment firm demanded the formation of a special committee of independent directors to represent minority shareholders (those who are not in management, and who are not or never were working at private equity firm Irving Place Capital, a major shareholder). The committee's purpose would be to conduct an in-depth, comprehensive review of the retailer's operations to maximize gross profit and cut expenses. He also said more cash should be returned to shareholders.

"Currently, there are three board members that work or have worked at Irving Place Capital," according to the letter. "We believe this [change] would be an exercise of 'best practices' for corporate governance. This in-depth review would satisfy and alleviate any concerns minority shareholders have regarding their representation. It will also show us the company is doing everything in its power to achieve its operating margin targets. ... A very wealthy shareholder at the top has been amply represented for years; we believe minority shareholders deserve appropriate representation!"