Private equity hunts for the next Lululemon
3:44 PM, E.T. | March 29, 2011
Can Canada produce another retail sensation like Lululemon Athletica Inc. (LLL-T), the yoga and sportswear maker that has grown nearly three-fold in as many years?
U.S. private equity firms flush with deployable cash are scouring Canada's retail landscape to find out, said Ken Tuchman, vice-chairman of investment and corporate banking at BMO Capital Markets.
Lululemon has captured the imagination of U.S. investors as no other Canadian retailer has done before. Among the top investors in the Vancouver-based firm, 23 of 25 are based in the United States, the company's biggest market.
The stock has doubled in the last year on the back of strong profits and sales growth.
"Buyers are asking, 'is there a concept that exists now in Canada that might replicate the (success) that Lululemon had and can I help fund that growth?'," Tuchman told Reuters in an interview from New York.
"Everyone is searching to find the next Lululemon. Lulu started off small, expanded and exploded geographically. This model is what a lot of private equity professionals are trying to discover."
Canada routinely attracts the attention of U.S. investors who see it as a petri dish for nourishing raw talent, and the retail sector has been a favorite poaching ground.
With the shadow of the global financial crisis starting to recede, North American private equity investors who held off deploying capital in recent years are coming back to market.
Private equity firms could have as much as $400 billion US in funds available to be deployed across industries and they are likely to be under pressure to spend it, Tuchman said.
Canadian retail has stolen the spotlight so far this year as Lululemon continues to surprise investors and as Target Corp. (TGT-N) and other U.S. retailers announce expansion plans north of the border.
"The market valuations of retailers in Canada are modest, certainly relative to their U.S. counterparts," Tuchman said. "There could be a real opportunity and willing sellers there."
Canadian retailers are also seen as acquisition targets as a scarcity of commercial property in the country makes them attractive hosts for U.S. companies trying to gain a foothold in the market.
"There's a lot of activity in the retail sector. There's pent-up demand," said Tuchman, who forecasts a rise in retail M&A activity in Canada.
The dollar-store industry has been clearly in the sights of U.S. private equity ever since Kohlberg Kravis Roberts & Co LP bought Dollar General (DG-N) for about $7.3 billion four years ago. Dollar General now has a market capitalization of $10.8 billion.
During the recession, more consumers flocked to dollar stores and valuations of such firms have soared.
Family Dollar (FDO-N) has been the subject of takeover bids, and last year U.S. firm Dollar Tree Inc. (DLTR-Q)bought Canada's Dollar Giant Store Ltd.
Bain Capital owns a stake in Dollarama Inc. (DOL-T), Canada's biggest chain, and there is speculation that there could be another private equity buyer.
"There is a lot of interest in the dollar store space right now," said Noam Cohen, managing director, food, consumer and retail at BMO Capital Markets, a unit of BMO Financial Group.
"This is a space that people are going to consider where consolidation makes sense, both north and south of the border," Cohen said.