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For the exclusive use of j. timbes, 2022. KEL446 Revised August 2, 2010 MICHAEL MAZZEO Steve & Barry’s: To Save or Not To Save? Fashion isn’t a luxury, it’s a right.1 —Howard Schacter, chief marketing officer, Steve & Barry’s In late August 2008 Jessica Daniels, an associate at private equity firm Bluestone Partners, stepped into her manager’s office for an emergency meeting. “They just received a stalkinghorse,” her manager said, pushing a thin sheaf of articles and financial statements across the desk to her. “The board wants to know if we should bid. The vote will be in three days.” Over the next hour Daniels’s manager provided more details on her assignment: evaluating newly bankrupt retailer Steve & Barry’s for a possible acquisition by Bluestone. Steve & Barry’s had risen from a seller of licensed collegiate gear in the 1980s and 1990s to a popular destination for consumers seeking trendy and celebrity-branded fashions at rock-bottom prices. Located in increasingly larger spaces such as mall sites vacated by major retail players, the company featured high-profile product lines by sports and media stars such as Stephon Marbury, Venus Williams, Sarah Jessica Parker, and Amanda Bynes—all for less than $10 an item. By 2008 Steve & Barry’s had more than 250 stores generating estimated annual sales of more than $1 billion. The company’s downfall was quick. It had maintained low prices through a variety of costcutting measures, including sourcing carefully from overseas manufacturers and judiciously selecting retail locations. But hampered by a weakening economy with ever-tighter credit markets, the company had been forced to file for Chapter 11 bankruptcy in July 2008. In August it received a stalking-horse offer, or first official takeover bid, of $163 million from Bay Harbour Management. Now Daniels had to generate a recommendation for Bluestone’s board: should the firm make an offer for Steve & Barry’s? She knew her analysis would include potential sources of value still held by the bankrupt retailer, including its popular celebrity-branded lines and strong word-ofmouth, as well as factors that had contributed to its fall, including a growth strategy that placed new stores in a wide variety of locations in the United States. Daniels also knew that the board did not want a simple yes-no answer: her manager had emphasized that she would have to back up her recommendation with ample evidence—and whether she recommended acquisition or not, she had to provide suggestions for turning Steve & Barry’s around, as the board might choose to bid regardless of her advice. 1 Maria Puente, “Top Fashion Designers Go Down-Market,” USA Today, September 25, 2007, lifestyle/fashion/2007-09-25-fashion-downmarket_N.htm. ©2009 by the Kellogg School of Management, Northwestern University. This case was prepared by Professor Michael Mazzeo with the assistance of Ariel Shwayder and Sachin Waikar. The author received additional assistance from Professor Jennifer Brown, Professor Meghan Busse, Maja Butovich, Professor Tom Hubbard, Professor Justin Lenzo and Abhi Agrawal ’10, Ashley Ganz ’10, and Bryan Law ’10. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means— electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Kellogg School of Management. This document is authorized for use only by jonathan timbes in MBAE 6865 Spring 2022 taught by Michael Roach, Middle Tennessee State University from Feb 2022 to May 2022. For the exclusive use of j. timbes, 2022. STEVE & BARRY’S KEL446 Steve & Barry’s: The First Twenty Years Steve Shore and Barry Prevor, childhood friends from New York’s Long Island, began making T-shirts in their basements and selling them at flea markets in the early 1980s.2 They opened the first Steve & Barry’s store near the University of Pennsylvania in 1985, offering licensed collegiate clothing and gear at prices lower than those of campus bookstores.3 In the 1990s Steve & Barry’s expanded to include locations near many Big Ten campuses, including Michigan State University, the University of Michigan, the University of Illinois, the University of Wisconsin-Madison, Indiana University, and Purdue University. This initial targeting of the university market worked well for Steve & Barry’s and it became known for its universitybranded T-shirts, hats, and varsity jackets. In 1998 a Taubman Centers executive visiting the Ann Arbor, Michigan, store suggested that it would be a great addition to the new mall being built in nearby Auburn Hills.4 Thus, Steve & Barry’s first dramatic venture into the noncampus market came when it opened a 25,000-square-foot store at the Great Lakes Crossing Mall.5 This change in location (and corresponding increase in store size) necessitated a change in product lines. Steve & Barry’s began selling casual sportswear, including T-shirts with irreverent text and logos, to supplement its stable of university products. By 2000 Steve & Barry’s was aggressively expanding in terms of both number of locations and product lines.6 According to industry observers, by offering a steadily increasing variety of middle-quality casual clothing under $10, Steve & Barry’s took “extreme retailing,” or the combination of low prices and good value, “to the next level” compared to established retailers in this space such as Target and Old Navy.7 The business model was based on careful attention to costs through tactics such as opening stores in downscale malls for lower rents, selecting overseas manufacturers to minimize tariffs, and relying on word-of-mouth advertising. Consumers seemed to appreciate Steve & Barry’s combination of low prices and kitschy stores with retro ad decorations. Supported by a small-business financier and California-based Cathay Bank, the retailer began expanding slowly. But the founders had even greater ambitions: Shore noted that they were determined to transform the business from a “small entrepreneurial mom and pop” to a “world class” retailer; Prevor added, “We don’t really see any limit to our domestic growth.”8 2 Divya Watal, “Luring the 10-Buck Crowd,” US News and World Report, September 11, 2005, biztech/articles/050919/19eeretail.htm. 3 Eric Wilson, “Is This the World’s Cheapest Dress?” New York Times, May 1, 2008, 01STEVE.html. 4 Greta Guest, “Steve & Barry’s Retail Revolution: The Price Is Right,” Detroit Free Press, July 26, 2005, 5 Elizabeth Lowe, “Steve & Barry’s to Begin Liquidating Stores,” Flint Journal, November 26, 2008, index.ssf/2008/11/steve_barrys_to_begin_liquidat.html, and “Steve & Barry’s Plans Aggressive Growth,” Sporting Goods Business, May 1, 2006, 6 Internet posting, “Steve & Barry’s—U.S. Casual Apparel Pioneer,” August 2, 2007, 7 Watal, “Luring the 10-Buck Crowd.” 8 Ibid. 2 KELLOGG SCHOOL OF MANAGEMENT This document is authorized for use only by jonathan timbes in MBAE 6865 Spring 2022 taught by Michael Roach, Middle Tennessee State University from Feb 2022 to May 2022. For the exclusive use of j. timbes, 2022. KEL446 STEVE & BARRY’S High Fashion, Low Costs, Major Growth In 2006 management sought to remake Steve & Barry’s as part of a “full-blown revolution,” according to Shore, hoping to sell items comparable to those available at Gap, J. Crew, and other apparel retailers—but each for $8.98 or less.9 The “History” section of the company’s Web site laid this idea out in greater detail: Steve & Barry’s is about change. It’s about changing the way that consumers shop for their clothes and changing the way that retailers cater to them. Steve & Barry’s is about stripping away the gloss and giving consumers something real. The fact is that great clothing doesn’t really have to cost that much. It’s a simple idea, but also a big idea—big enough, that is, to turn the industry on its ear. By delivering on our promise to provide premium apparel at impossibly low prices, Steve & Barry’s is single-handedly changing the retail landscape. We’re busting the model.10 Consumers and industry observers were excited about this “democratization of design,”11 though Shore and Prevor were not the first to connect high fashion with low prices—Target’s Mossimo and Mizrahi lines and Kohl’s collaboration with Vera Wang were already established, among others. Furthermore, the NPD Group noted that although only 25 percent of overall U.S. retail sales in 1975 involved private-label products, 53 percent of those in 2007 did.12 But Steve & Barry’s aimed to achieve this vision on a grander scale, with more and even cheaper products. Soon Steve & Barry’s, headquartered in Port Washington, New York, made good on the promise, becoming “a store that sells stylish celebrity-branded clothes at prices that are absurdly inexpensive, lower than those at Old Navy, H&M, or Forever 21, undercutting even Wal-Mart by as much as half.”13 See Exhibit 1 for a price comparison of dresses sold at Steve & Barry’s and two competitors. Steve & Barry’s had 264 stores by mid-2008, including the “perpetually mobbed” one at the Manhattan Mall in New York City; lines at the registers were often over twenty deep, helping to explain 2007 national sales of about $1.1 billion and same-store sales growth of about 20 percent between early 2007 and 2008.14 Product Lines Steve & Barry’s celebrity-branded lines included jean jackets and sundresses from actress Sarah Jessica Parker’s Bitten collection; heart-printed hoodies from the Dear collection by teen TV/film star Amanda Bynes; performance wear from tennis star Venus Williams’s EleVen collection; a surfing/skating line featuring legendary surfer Laird Hamilton; golf apparel sponsored by up-and-coming pro Bubba Watson; and basketball shoes by New York Knicks star Stephon Marbury. Parker, the star of TV’s long-running, trendsetting Sex and the City series, noted that she “had never heard of Steve & Barry’s,” but “loved their manifesto,” prompting her 9 Wilson, “Is This the World’s Cheapest Dress?”
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