About Alexandra Biesada

The deal never left the dock. After initially insisting that the combination of troubled Pier 1 Imports and Cost Plus was “a marriage made in heaven,” CEO Alex Smith said last week that Pier 1 was abandoning its unsolicited bid to acquire its smaller rival, less than three weeks after making its initial approach. The $88-million offer, which Cost Plus quickly dismissed as “distracting and ill-timed,” got a chilly reception on Wall Street. Goldman Sachs issued a pessimistic view of the proposed acquisition and lowered its earnings and price target, which drove down Pier 1’s stock. With both companies struggling to turn around their shaky businesses in a weak economy, this union looked doomed from the start, despite Smith’s assertion that given the two firms’ “similar customer bases and broadly similar business models” they are “an excellent fit.”

Upon pulling the plug, Pier 1 said it was unlikely it would be able to buy Cost Plus at a price that would make sense for its shareholders.

If there’s a silver lining to the current market malaise it’s that ill-conceived deals, such as the Pier 1/Cost Plus tie-up or the much-maligned Blockbuster/Circuit City combo, are becoming harder to complete. Indeed, a recent report from Thomson Reuters found that global M&A activity dropped 35% in the first half of 2008, as the credit crunch dried up cash needed to complete deals and economic uncertainty made companies and shareholders reluctant to take on additional risk.

Investors reacted to the news of both deals — and the subsequent release of weak financial results by Pier 1 and Circuit City — by driving down the stocks of all those involved. Indeed, Circuit City’s shares have sunk to their lowest level since 1991. As for the Pier 1’s shares, after decreasing 40% since its bid for Cost Plus was announced on June 9, they’ve rebounded a bit.

So for now, the boom in M&A and private equity buyout deals for retailers appears to be over. That’s bad news for investment bankers who’ve feasted on the fees deals generate. On the plus side, it provides an opportunity for struggling retailers to get their own houses in order, before taking on another chain’s problems.

Pity the long-suffering board members of Whole Foods Market who have to contend with founder and CEO John Mackey’s ill-considered blog outbursts. Mackey, who resumed blogging last month after a 10-month hiatus that resulted from the dust-up over comments he made under the online alias “Rahodeb,” has put his foot in his virtual mouth once again. But this time his comments weren’t posted to his CEO’s Blog, but instead appeared in an interview he gave in late May to another blog called Chews Wise.

Mackey, who can’t be accused of not speaking his mind, said “If I could go back in time, we wouldn’t have done the Wild Oats acquisition.” Say what?! The ink is barely dry on the controversial $565 million deal, which closed last August after a six-month battle with the Federal Trade Commission. The takeover also led to an investigation by the Securities and Exchange Commission following the revelation that “Rahodeb” had been secretly promoting his company’s stock and disparaging his rival’s management team in postings to a Yahoo stock message board. The investigation led to the suspension of Mackey’s blogging privileges until the SEC and the Whole Foods board completed their investigations. The good news, says Mackey in his blog, is that he’s free to post again “with the board affirming their complete support for me and the SEC recommending that no enforcement action be made against Whole Foods market or me.” The bad news, for Whole Foods shareholders anyway, is that Mackey still can’t keep his mouth shut.

Granted, his comments to Chews Wise focus more on the cost to him personally and the disruption to the company he built rather than the business merits of the deal: “We spent tens of millions of dollars in legal fees, we’ve been investigated, it’s been highly disruptive. I didn’t realize it would cause so much grief.” Really? The market leader in an industry with few competitors tries to takeover its #1 rival and he’s surprised by the FTC’s reaction? Don’t get me wrong. I supported the deal, because I viewed Whole Foods Market’s competitive universe more broadly than did the FTC. But Mackey and Whole Foods would have to have been incredibly naïve not to expect a messy fight. Indeed, the FTC is appealing the ruling that allowed the acquisition to proceed despite the fact that it’s a done deal.

Still, Mackey’s lukewarm support for the Wild Oats integration to date is less than encouraging. He says that from a “business perspective,” it’s too early to tell whether the merger will be an overall success” but added “We’re pretty happy so far.” How’s that for damning with faint priase? With food prices soaring and Whole Foods’ stock down nearly 40% since the acquisition, the board and shareholders would be better served by some outspoken cheerleading rather than Mackey’s characteristic candor.

When the nation’s largest big-box specialty toy seller was taken private in 2005 by a buyout group led by real estate firm Vornado Realty Trust, some were quick to predict that its days were numbered. The company had lost its first-place ranking in toys sales in the US to retail-giant Wal-Mart and was bleeding red ink from a series of holiday price wars. Toys “R” Us went on to shutter some 85 toys stores over the next two years. However, while its US toy business fizzled the company’s fast-growing Babies “R” Us chain (launched in 1996) thrived, as did Toys “R” Us retail stores overseas.

Now three years and a new chief executive later, the toy seller is back in expansion mode with a new side-by-side strategy designed to capitalize on the strengths of its growing Babies “R” Us chain. The retailer hopes to boost traffic at its Toys “R” Us stores by situating them next door to its Babies “R” Us locations, which are visited much more frequently by moms shopping for apparel, diapers, formula, and other infant products. The side-by-side stores will have separate entrances, but shoppers can cross from one to the other once inside. Other retailers, including The Gap and Lane Bryant, have experimented with side-by-side stores with mixed results.

The new side-by-side initiative comes on the heels of a nascent turnaround in the company’s business. After five consecutive years of negative same-store-sales comparisons at the company’s US stores, Toys “R” Us posted modest positive gains in fiscal years 2007 and 2008. Indeed, I came away favorably impressed from a visit to a Toys “R” Us store here in Austin last December after pretty much giving up on the chain years before.

Toys “R” Us plans to open 16 of the side-by-side locations this year and begin converting many of its 600-odd toy stores into smaller side-by-side locations. Because the company operates more than twice as many toy stores as baby stores, the tandem strategy will involve a significant increase in its babies business.

It’s an aggressive and potentially risky strategy to take. But given the thrashing Toys “R” Us has taken from seemingly unstoppable Wal-Mart and CEO Jerry Storch’s former employer Target (among others), the company probably has no other choice than to double its bet and go for broke.

Target reported its first quarter earnings Tuesday and the results were disappointing, if not unexpected. The cheap-chic retailer posted net earnings of $602 million, down from $651 million a year earlier. Same-store sales, considered the best indicator of a retailer’s health, declined by 0.7% (vs. an increase of more than 4% over the same period last year). Ouch!

Target’s new CEO Gregg Steinhafel, who succeeded Bob Ulrich earlier this month, blamed the miss on a challenging economic environment and a disproportionate share of sales of low-margin goods, such as groceries and other essentials, relative to higher-margin stuff like apparel.

Speaking of apparel, a category that has long distinguished the nation’s #2 discounter from rivals Wal-Mart and Kmart, Target created a buzz in the fashion world earlier this month with its first line of eco-friendly clothing from former Gap designer Rogan Gregory. (Who?) However, all the green from the green-apparel went into the coffers of a Barneys store on Madison Avenue, which hosted the debut of the eco-designer’s collection, now on sale at Target stores. It was an unlikely, if inspired, pairing: luxe Barneys — a purveyor of $348 Warhol Factory X Levi’s slim leg jeans — with cheap-chic Target, where a pair of skinny jeans costs about 20 bucks. Actually, Gregory’s eco-friendly leopard-print skinny jeans represent the high end of the price range at Target where they retail for $39.99. (I’m guessing no real leopards were used or they wouldn’t be eco-friendly.)

I wonder, with Target’s patrons opting for more pedestrian items, like paper towels, will many shoppers toss apparel from Gregory’s 60-item collection into their big red shopping carts? To be fair, with prices topping out at $45, the line isn’t expensive. Target’s merchandisers are betting the sustainable fashions are an affordable treat shoppers can feel good about buying. Indeed, a bamboo-and-hemp t-shirt is cheaper than a Prius! We’ll just have to wait for May and June sales figures for a hint at how the line is faring.

Meanwhile, Target has just closed its credit-card deal with JPMorgan Chase, which Steinhafel says will provide enough liquidity for Target to go ahead with its business plans, despite slumping sales. Like JC Penney, which laughed in the face of danger by launching its upscale American Living Collection into the worst retail storm in years, it’s damn the torpedoes, full speed ahead at Target!

Hard times are proving to be good times for Wal-Mart Stores. The retailer posted its first-quarter earnings on Tuesday and it was all good: a 10% increase in net sales and an uptick in profits of nearly 7% to $3.02 billion (vs. the first quarter of last year). CEO Lee Scott, who said the year was off “to a solid start” evoked the memory of company founder Sam Walton boasting that Wal-Mart’s business model is “even more relevant to our customers today” than when Walton created it.

Clearly the anxiety — and for some real pain — caused by rising fuel and food prices is driving many consumers through Wal-Mart’s doors, including some who in flusher economic times might have turned up their collective noses at shopping at a soulless Wal-Mart supercenter. Among them there may be some Target shoppers. Wal-Mart’s arch rival, whose stock and sales growth had been outperforming its larger rival’s until last year, has not fared as well. First quarter sales at the #2-discount chain rose 5%, while same-store sales were down nearly 1%. Wall Street has bid Wal-Mart’s shares up about 22% over the last six months, while Target’s share price has dropped by 6%.

The timing of the economic downturn has been stellar for Wal-Mart, which has been working hard to improve both its corporate image and in-store experience. Amenities, such as better lighting and hardwood floors, and more importantly better merchandise (more organic and fresh foods and nicer apparel) may impress newcomers, while Wal-Mart’s core lower-income customers will continue to shop its stores for deeply discounted grocery and pharmacy items. In short, Wal-Mart is presented with a golden opportunity to connect with a broader segment of consumers. It’s also well positioned to capitalize on the flood of rebate dollars flowing into the economy in the second quarter. To entice shoppers, the retailer is offering to cash economic stimulus check for free (no purchase required). Of course, there are plenty of incentives to spend your rebate in its stores.

To grab consumers’ attention the company’s latest ad slogan poses the question: “What will you do with your savings?” The “Save money. Live better,” campaign, which I blogged about last year, pitches saving as a virtue — rather than an unattractive chore — and invites us to think of the possibilities. It’s an optimistic message for these depressing times.