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South Moon Under is poised for national growth

South Moon Under makes the transition to new owners after 48 years.

At South Moon Under in Baltimore's trendy Harbor East neighborhood, hints of the retailer's beach roots show up among the more sophisticated fashions.

Colorful swimsuits hang on a back wall, stylish sandals beckon from the shoe area and wide-brimmed hats highlight bold-patterned maxi dresses and rompers.

The onetime Ocean City surf shack is under new ownership for the first time in 48 years. Even as some retailers are scaling back and consumers shop for nearly everything online, the new owners see potential for South Moon Under as a national brand.

They've done it before, propelling a single store opened in 1985 in Harborplace into the national chain White House/Black Market.

"We were very impressed with the strength of the business and the relationship the brand had with its customers,'' Michael Smith, one of the new owners, said of South Moon Under.

With 25 stores from Westport, Conn., to Richmond, Va., South Moon Under never has lost track of who its customer is, Smith said, typically women in their early to mid-30s who want trend-appropriate fashions and, increasingly, mothers and daughters who can shop together for suitable fashion in one spot.

"It starts with a connection with fashion, and South Moon Under has done a good job of keeping that connection," said Smith, now CEO of the chain, which is moving its 75-person headquarters to Annapolis from Berlin near Ocean City.

Smith and his wife, Patricia Darrow Smith, and Rod Olson, all former White House/Black Market executives, acquired the company in March with backing from Columbia-based private equity group JPB Capital Partners and NewSpring Capital, a Radnor, Pa.-based private equity investor.

South Moon Under founder Frank Gunion, who started with one store in Ocean City in 1968, has retired but remains a minority owner and board member. Terms of the deal weren't disclosed.

When Gunion started the first South Moon Under store while still in college, he had no idea it would evolve from selling handmade surfboards and swimsuits into an upscale chain known for sophisticated fashion.

"I've taken the company as far as I'm capable of, and, like a lot of business, it's good to have new blood and energy come in," Gunion said.

He has known the Smiths for years, dating back to their days as fellow Maryland-based retailers.

"I saw a phenomenal opportunity to bring someone in who knows more than I do and understands our brand and our culture," he said. "They have been through what we're about to go through."

The new team envisions growing from 24 stores and $50 million in sales to 60 to 80 stores up and down the East Coast and $100 million in revenue over five to seven years. The first new stores are slated for South Florida next year.

Smith said the South Moon Under concept fits well with new lifestyle and Main Street-style shopping centers being planned or built around the country, and developers already are vying to sign the brand.

The owners also aim to expand online from 10 percent to more than 25 percent of revenue. While the stores will continue to emphasize a curated selection of top brands, the retailer also is hiring a designer to expand its in-house brand.

Majority investor JPB Capital Partners also was attracted by the experience of the new management team, plus the "brand promise of South Moon Under," said Jim Bolduc, its senior managing director.

The private equity group invests in small but growing consumer-oriented brands, including The Greene Turtle Sports Bar & Grille and ZIPS Dry Cleaners.

"In the retail world, you want to be at the high end of the market or the low end of the market, competing with Neiman Marcus or Saks, or competing with dollar stores … not JCPenney or Macy's, who are all things to everyone but don't have an identity," Bolduc said. "We think there are pockets of retail that are struggling and will continue to struggle and there are pockets of retail that will do very well."

South Moon Under's appeal with millennials gives it strong growth potential, he said. Women in their 20s and 30s outspend nonmillennials by a third on apparel each year, said Bolduc, citing a 2012 report by The Boston Consulting Group.

"Retail at the heart of it is: Do I have the right product in the right location that identifies with the customers?" said Bolduc, adding that South Moon Under excelled at merchandising and choosing strong sites. "The way the millennials and new generations shop is much more of an experience."

Brittany Christoffersen, a 26-year-old pediatric nurse from Tampa, Fla., was shopping in Harbor East on Thursday while visiting family in Baltimore when the window display at South Moon Under, unfamiliar to her, caught her eye.

"That's the stuff I'd wear," she said. "I like clothes that are comfy and relaxed but still look like I took the time to get dressed."

Jennifer Hammaker, who manages a fund for university startups for TEDCO in Baltimore, counts South Moon Under among her regular shopping haunts. She buys clothes there for work and for fun and said it appeals as well to the younger tastes of her 22-year-old daughter.

"It's a great store," she said Thursday while buying a skirt and top to wear out to dinner for her anniversary. "They have very progressive, contemporary clothes. You don't have to worry about seeing yourself walking down the street. You can be confident that you won't see it elsewhere."

That's by design, said Patricia Smith, the firm's new chief creative officer. Keeping merchandise fresh sets the chain apart from national brands she called "boring, with no excitement or expectation of something new."

She said strong, longtime vendor relationships and limited administrative layers help the chain stay nimble, while she and the buyers stay on top of trends.

"The product is trend-right and it's exciting, and it comes in and goes out — it doesn't have a super long life on the floor," she said. "There's a sense of urgency because if you don't buy it, we run out of it. Our goal is to get inventory in and move on to the next fabulous item."

Patricia Smith left her job as a restaurant manager at the Hyatt Regency Baltimore Inner Harbor to help start The White House in Harborplace's Pratt Street pavilion along with former Hyatt general manager Rick Sarmiento, who became the retailer's president. The store sold women's clothes in cream, ivory and oatmeal hues.

In 1995, five years after Michael Smith joined the retailer, the 33-store chain added the first Black Market store in Del Mar, Calif., selling garments in shades of black or gray. The concepts were combined in 1997. When the chain was sold to Chico's FAS for $90 million in 2003, it had grown to about 100 locations.

The husband and wife team moved to Florida and helped Chico's expand to more than 340 stores and $400 million in sales before moving back to Maryland to go into retail consulting, including for South Moon Under.

"White House was very unique at the time," said Mark Millman, CEO of Millman Search Group, an Owings Mills-based retail consulting and recruitment firm, whose firm helped the White House team hire retail managers.

The timing is right, he said, for the couple to replicate their earlier success, though challenges are plentiful. The retail landscape is now crowded with online sellers and other competitors, and real estate costs are higher than ever. But, he said, South Moon Under is well positioned because of the expertise behind it.

"Michael and Patricia are a proven team that has built a major national brand," he said. "They know the competition and are a proven commodity."

lorraine.mirabella@baltsun.com

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