While many specialty retailers have recently been shedding concepts, Dress Barn seems to think there's something to be gained from adding struggling fashion chain Tween Brands to its portfolio. Leonie Barrie looks at the detail of last week's merger deal - and asks what's really in it for the two companies?

In what is widely seen as a bailout for the girls' fashion operator, Dress Barn last week outlined its plans to buy Tween Brands in a stock-swap transaction worth around $157m

The deal is expected to close in October of this year, and will see Tween Brands become a separate subsidiary of Dress Barn, which sells discounted career and casual fashion through its 841 Dressbarn and 716 Maurices stores.

The combined business will have net sales of around $2.4bn and operate 2,465 stores.

Shares in both firms rose after the plans were announced - suggesting the market liked the news.

But what's really in it for the companies involved? After all, the more recent trend has been for retailers to focus on their core chains and shutter unsuccessful spin-off concepts.

Just think of Abercrombie & Fitch closing its Ruehl chain, Talbots selling J Jill to a private equity firm, and Aeropostale axing its Jimmy'Z concept to name but a few.

And what could a successful career and casual fashion apparel retailer, whose third quarter sales rose 7%, want with a firm which aims at pre-teens and whose sales in the same period told a very different story as they tumbled 23%?

Existing synergies
Although there's a lack of obvious overlap between the two companies, they are keen to play up the synergies that do exist - and the strengths of the deal to both parties.

For Tween Brands - which targets 7 to 14-year-old girls through its 908-store Justice chain - part of the appeal is undoubtedly the repayment of $165m in outstanding bank debt.

This immediately alleviates the financial pressures on the New Albany, Ohio based firm, which has spent the last year converting its Limited Too stores to the value-focused Justice nameplate in an attempt to target shoppers trading down to lower-priced goods.

As Dress Barn president and CEO David Jaffe points out: "We believe that Justice is a highly attractive business that has come under significant pressure as a result of the tight credit market and the challenging consumer environment."

Speaking on a call with analysts, Tween Brands' CEO Mike Rayden, who will continue to lead the unit, said: "By taking away [this debt] we can now focus on what we really do best, which is merchandising, product development, marketing etc.

"And I think that focus without all the distractions we had from a financial standpoint will improve our performance rapidly."

Diversify and expand
For Dress Barn, the agreement provides an opportunity to diversify and expand its existing business in the $12bn tween girls' apparel market.

And, perhaps surprisingly, there could also be some overlap between existing customers too, with the three chains now reaching from mothers to their daughters.

Rayden explained: "If a Dress Barn's customer is in her 40s and if the Maurices' customer is in her mid-20s - those are my girls' moms."

He added: "We have not done database overlays yet, but I'm sure there will be synergies by combining these three large databases to better communicate to the consumers and take advantage of where the overlaps may come."

Other competitive advantages for the combined company are likely to come from boosting sales and profitability by implementing best practices across the entire organisation, as well as generating cost savings through economies of scale in areas such as sourcing and real estate.

"We see opportunities to secure good prices for overseas production," Jaffe told analysts.

Maurices' integration
What investors are really hoping for is that Dress Barn manages to replicate the integration of the Maurices chain, which it bought for $320m at the end of 2004.

Since then, it has managed to grow the division from 477 to 716 stores, with annual sales lifting from $366m to $556.6m.

Describing Maurices as a "rare retail acquisition that worked," analysts at JPMorgan wrote in a research note: "It appears that investors believe that the Dress Barn's successful acquisition and growth of Maurices' top line and profitability can yet again be replicated with Tween Brands."

However, David Jaffe notes that Tween Brands is at a different stage in its development than Maurices was.

"Maurices had significant growth potential and by coming together we were able to get significant synergies, whereas here we have a tremendous business, a fairly large store fleet of over 900 stores, and it's about helping them restore their business," he said.

"This really is a unique niche, there's really no direct competition for a girls' tween specialty store - so it's a great opportunity to engage that customer."

Tween niche
And this indeed may be at the crux of the deal.

Tween Brands, described as "the largest premier tween specialty retailer in the world," sits in a sector that many analysts believe is more resilient than the overall apparel category to the downturn in consumer spending.

And crucially, the top companies could emerge in stronger competitive positions when economic conditions improve.

Parents typically purchase a large portion of their tweens' clothes, and are more likely to cut back on their own expenses than their children's. Furthermore, they are often free to spend the money they earn or are given on whatever they choose. And because they outgrow their clothes, they buy on a shorter replenishment cycle.

Stellar performers at the top end of the tween age bracket include Aeropostale and The Buckle, which both posted double-digit increases in same-store sales for the month of May as shoppers snapped up their trendy jeans and accessories.

And look at one of the few retail concepts to launch in the US this year: teen apparel retailer Aeropostale last month opened its first "P.S. from Aeropostale" new store format which targets a similar demographic to Tween Brands.