South Moon Under, fresh off buyout, looks to grow
In 2011, Mitt Romney, then a Republican presidential candidate, famously told an audience at the Iowa State Fair that "corporations are people, my friend."
South Moon Under takes that philosophy a step forward: The Berlin-based clothing and accessories retailer has a soul, the company's top executives assert.
Two years shy of its 50th birthday, the retailer is looking to hit the big time, expanding from two dozen stores scattered around the mid-Atlantic to up to 250 across the country. That would put it in the same territory, in terms of the number of locations, as American Apparel, David's Bridal and The Limited.
To get there, South Moon's founder, Frank Gunion, has sold a majority stake to a private equity firm whose pockets are deep enough to bankroll an expansion. And he persuaded his new partners to bring in an executive team experienced in managing the growth of specialty clothing retailers.
Investment firm buys majority stake in South Moon Under
“Retail is a very, very tough business, especially for small companies and has been for several years," said Gunion, who founded the brand as a surf shop in Ocean City in 1968. "So we realized, for our future, we had to get larger."
But the company can't simply go bursting at the seams. Here's the signal dilemma the retailer faces going forward: To survive, it must grow; but if it grows too much, it might not survive.
As South Moon Under enters a new phase, holding fast to its identity becomes crucial, said newly installed CEO Michael Smith.
"It’s not a question of how big we can get but a question of how big should we get," he said. “You can still keep the soul of the business, which starts with the product and is reinforced by the people in the store and the customer experience."
For his part, Gunion is staying put as a minority owner and member of the company's board. Although he will no longer be involved in day-to-day business, he plans to remain a force in determining South Moon Under's direction.
“It’s my baby," he said the other day, seated at a conference table in the company's offices off Franklin Avenue, just east of Route 113. "I want to continue to see it be well-respected.”
The brand traces its history to a surf shop on 32nd Street in Ocean City. An avid surfer himself, Gunion opened the store during a summer off from studying international relations at George Washington University.
He called it South Moon Under, a reference to the time of day when the Earth's lone satellite is directly on the far side of the planet. That marks the lowest ebb of low tide — and the best time to ride the waves in Ocean City.
He went back to school in the fall but dropped out at the end of the semester. The tide was pulling him back toward the beach and his surf store.
"I was never one of those who had great, long-range plans," Gunion said.
Over the years, he added a second Ocean City location, then one in Rehoboth Beach and another in Bethesda. By then, South Moon Under had gone beyond simply surfing gear to include clothing and swimwear. Instead of depending on the summer months to fill the tills, the company could entice customers year-round with fashions for all seasons.
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Today, South Moon operates 24 stores from Virginia to Connecticut. It also has grown to include online sales as well as its own clothing line consisting of four separate labels.
Its target is women age 25-35 years old, but executives say it is designed to be a place where both mother and daughter can walk out laden with full shopping bags. True to its surfing roots, the clothing styles it picks and develops have a distinctly beachy feel.
As he approached his retirement years, Gunion began thinking about succession. But he realized there was another, related issue: South Moon probably wouldn't last much longer at its current size.
"If you think about it, how many small retail stores do you know that survive more than a few years?" he asked. "It’s very, very few these days. So, there’s a certain scale you have to have to be successful and have the resources to do the job well. We’re competing against the biggest companies in the world.”
He met with several private equity firms before signing a deal with JPB Capital Partners in March.
Founded in 1995, the Columbia, Maryland,-based group has invested $200 million in three dozen consumer-oriented ventures, ranging from restaurants to retail. Its partners have included the Greene Turtle Sports Bar & Grille, Ticknors Men's Clothiers and Calgon health and beauty.
“I really felt a connection to the JPB group and the leadership of their company," Gunion said. "And they identified with what we were doing. We spoke the same language and had the same thought process. We want growth, but it has to be done in a way where we preserve the brand and the culture of the company."
For the company's new leadership, Gunion turned to a one-time foe.
Smith's wife, Patricia, founded the clothing retailer White House/Black Market. Back in the 1990s, they muscled South Moon out of its lease at its Annapolis location.
"He beat me up," Gunion said with a laugh.
The Smiths oversaw the expansion of the White House/Black Market brand to 107 stores before selling it in 2003 to Chico's. They stayed on board for a few more years before becoming consultants to other retailers, including their former adversary, South Moon Under.
Now Michael Smith is its chief executive officer and Patricia Smith is its chief creative officer.
It is anything but an auspicious time for clothing retailers, though. Sears, Kmart, Macy's, J.C. Penney — all of those once-formidable brands have announced store closures in recent years as they grapple with new competition from online retailers.
That isn't the only problem facing traditional department stores, Smith said.
“You have to build your business around your customer, and I think for whatever reason some brands get disassociated from ultimately who they’re working for," he said.
The key for South Moon Under's success as it grows will be to remain in touch with its customers and what they want, Smith added.
"You can’t just chase profit. You can’t sell the business and lose your soul. And I think JPB Capital has a long-term vision that aligns with all of us in the business," he said.
He and Gunion have big plans: making e-commerce a bigger part of the company's revenue, boosting the share of private label sales from 15 percent to 30 percent and growing to about 150-250 brick-and-mortar locations.
Gunion had to give up surfing a few years ago because of a shoulder injury. But he still is known to Boogie Board and body surf. A surfboard hangs on the wall opposite from his desk.
Waves and retail trends have a lot in common, he added.
"We can guide it a little bit and we do, but the bottom line is we have to listen to the customer," Gunion said. "The wave has the energy. It has the control over what you're doing."
Contact reporter Jeremy Cox at 410-845-4630 or on Twitter @Jeremy_Cox.