Brian Sozzi Says New J. Crew Deal "Looking Like A No-Go" (JCG, SHLD, URBN)

Brian Sozzi of Wall Street Strategies has a research note out on his take of the rumors today that Sears Holdings SHLD and Urban Outfitters are looking at a potential counter offer for J. Crew JCG. J. Crew was acquired by TPG and Leonard Green late in 2010. In the note Sozzi writes why a deal is not likely to happen. "Seeing as we have coverage on Urban Outfitters, I will take a brief moment to outline why a deal is unlikely to occur. However, i do note that in a wild set of circumstances, if J Crew does join forces with Urban Outfitters, it will give the eclectic retailer a higher income customer base (less college kid more 25-35 year old), more mall-based stores, and greater leverage over suppliers at a time of input inflation," Sozzi wrote. Sozzi goes on to give reasons why the deal doesn't look likely. He notes, the significant balance sheet leverage required for such a deal. Sozzi mentions the consumer spending lines being blurred. Sales may be stolen from Urban Outfitters if a consumer buys a sweater at J. Crew. Sozzi also says that by buying J. Crew, there is no international growth there. "Urban is actively expanding into Europe, and is keen on entering the Far East by 2012-2013," he wrote. Sozzi also said that Urban Outfitters likes to develop its own brands. Lastly, he noted that, "J Crew is a lower ROA business, and the addition would jeopardize Urban's long-term 20% operating margin target." Shares of JCG are up $1.20 to $44.26 on news of the rumor, while shares of SHLD is up $1.63 to $73.09, and URBN is up 7 cents to $35.96.