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Japan’s Adastria Fashions Acquisition of Velvet

Culver City clothier Velvet has caught the eye of a Japanese retail giant.

The private women’s and men’s clothing company last week agreed to be acquired by Tokyo-based Adastria Co. Ltd. for $37 million.

Publicly traded Adastria, which owns 21 brands, more than 1,400 retail stores, and generated $1.8 billion in revenue last year, plans to expand the Velvet store count, although not aggressively, said Kei Liu, investor relations manager for the Tokyo company.

“We’ll open a few this year,” said Liu, who noted the deal is expected to close April 18.

Velvet, which makes the Velvet by Graham & Spencer brand that’s favored by celebrities, has eight retail stores in the United States and one in London, in addition to wholesale showrooms. Its women’s and men’s clothing and accessories are available through Nordstrom and Bloomingdale’s locations as well as e-tailer Shopbop.com. The company also markets through its own website.

There’s still room for the brand to grow, said Mickey Klein, co-founder and managing director at New York’s Astor Group investment bank.

“Velvet has a very appealing ‘now’ type of look and aesthetic and hasn’t developed its reach in Asia or its reach into its own retail locations in the U.S.,” Klein said via email. “The market is probably attractive for them to have many more of their own free-standing locations.”

New York private equity firm Snow Phipps Group had a majority stake in the company, with Velvet’s co-founders, Chief Executive Henry Hirschowitz, Jenny Graham, and Toni Spencer, holding the balance, said Andrew Dunst, vice president at Sage Group, a West L.A. investment bank that advised Velvet on the transaction. The co-founders are expected to stay on.

Representatives of Velvet and Snow Phipps didn’t respond to requests for comment.

Dunst said Velvet will be able to leverage Adastria’s expertise and supply chain.

In return, the purchase will expand Adastria’s holdings in the U.S. market, which had only included a minority stake in San Francisco apparel maker Marine Layer Inc. until now, Liu said.

“The U.S. is one of the largest clothing markets, so we want to have a presence there,” she said.

Adastria is still figuring out whether it will keep part of Velvet’s manufacturing in Los Angeles, she said. The company manufactures some of its products locally as well as overseas.

Needle, thread

Husband-and-wife team Hirschowitz and Graham started Velvet as an upscale women’s T-shirt business in 1997. Spencer, a music video stylist originally from England, joined soon after. Over the years, the company expanded its women’s wear line and added menswear. In 2006, it introduced the Graham & Spencer brand for which it is most well-known.

The trio, advised by Sage, sold a majority stake for an undisclosed amount in 2011 to Snow Phipps, whose $2.3 billion in investments are chiefly in industrial companies.

“We have in place a tremendous infrastructure here in Culver City,” Hirschowitz told the Business Journal at the time. “And this allows us to go and explore other things.”

Velvet had more than 200 employees and a 50,000-square-foot headquarters and distribution center when the 2011 deal went down.

Snow Phipps installed Andrew Megibow, its operating partner and former chief operating officer at women’s apparel company Ellen Tracy Inc., as nonexecutive chairman.

Megibow said in 2011 that his firm was attracted to Velvet because of its strong management and design team and well-run corporate infrastructure. Snow Phipps planned to turn Velvet into a lifestyle brand by adding accessories and wanted to open retail stores, which the company didn’t have then.

“We feel strongly about the prospects for standalone retail from a volume and branding standpoint,” he said.

Among Velvet’s eight U.S. stores, three are in Los Angeles, with outposts in Brentwood; Culver City; and Venice, on trendy Abbot Kinney Boulevard.

Snow Phipps’ investment time of six years is standard for private equity, said Camilo Lyon, a managing director at New York investment bank Canaccord Genuity Inc. who specializes in retail.

“Generally, private equity firms look for an exit over a five-year period,” Lyon said.

Adastria was founded in 1953. In April of last year, the company took a minority stake in Marine Layer, a clothing company founded in San Francisco in 2009 with 23 retail locations across the country. Its moves in the United States are part of a goal to become a global retailer.

“Our company’s aim is to grow bigger, especially overseas,” Liu said.

Although department stores have struggled lately as mall traffic has declined and sales migrate online, Velvet has the potential to shine, said Astor’s Klein.

“I believe department store retail in general is suffering on some levels, yet Velvet continues to perform,” he said. “With additional resources behind it, I believe the brand can continue to grow at a pace that can significantly outperform their competitors.”

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