The fashion bargain market has been something of a secret and brutal game of musical chairs.
Last year’s spate of big-consumer IPOs, from Warby Parker to Allbirds to Rent the Runway, have private labels looking to connect with a buyer and cash in too.
But the music has stopped, for now, and sellers still outnumber buyers.
WWD broke the news this month that Proenza Schouler, Khaite and ALC have tested the market or are still looking today. Outdoor Voices was also said to be considering a sale, according to a report by Bloomberg. The company did not immediately respond to inquiries Monday.
Ganni, Isabel Marant and others are also said to be in the market, wWhile the very loud and high-profile are more likely to connect with potential buyers who are at least willing to listen, as Tom Ford appears to have done through his reported conversations with Estée Lauder Cos. Inc., the brand’s beauty licensee. Ford is said to be seeking a deal that would be worth the company around $3 billion.
But being an up-and-coming clothing brand isn’t enough: sellers also have to find the right buyer.
Veronica Beard, for example, is said to have gently tested the shopping market earlier this year, but ultimately backed out after failing to find any buyers willing to pay for a growing scale brand.
That has the company biding its time, looking to continue growing and keeping an eye on the IPO market going forward, according to a source.
A representative for Veronica Beard declined to comment, but that would put the brand as part of the next wave of fashion IPOs, provided Wall Street is willing to take a look at the industry again. There are others waiting and watching to go public too, particularly Rihanna’s Savage x Fenty.
But those who aren’t quite ready for the klieg lights on Wall Street find themselves in a tough spot: They have to prove themselves in uncertain times to a small group of potential buyers.
“There has been a renewed focus on sustainable profitability,” said David Munczinski, principal at investor Firelight Capital Partners. “There are agreements that will be finalized before the end of the year, but I think that the valuation, the multiple of [earnings before interest, taxes, depreciation and amortization] will reflect the uncertainty about where 2023 is headed.
“What you are seeing now is a widespread recognition among investors, especially in the direct-to-consumer space, that sales through COVID[-19] Online sales, marketplace sales, online wholesale sales are unsustainable,” Munczinski said. “There really was a COVID[-19] package.”
That’s important because acquisitions and purchases are priced as a multiple of earnings and sometimes sales.
But given that the market saw the business last year as a pandemic anomaly, there is no solid foundation on which to base prices.
So Munczinski said there has now been a pause in trading that will last into the third quarter as buyers and sellers grapple with valuations.
In a more normal economic outlook, prices could settle on earnings estimates over the next year, if the coming year of 2023 weren’t a huge question mark with the threat of an impending recession, an ongoing war in Europe, the skyrocketing inflation. high and the world continues to wake up from the pandemic.
“Suppose there is a recession, things will continue like this,” Munczinski said of the deals market. “Let’s assume there’s no recession, you’re still going to have to get through the inventory situation, both at retailers and now at brands. That has to be resolved. The next shoe to drop is the inventory situation which leads to a working capital problem for a lot of these companies, so that becomes the next area where there is investor scrutiny.”
On top of all of this (unusually strong sales last year, a whirlwind of economic troubles this year, and uncertainty around next year), there’s another key factor holding back the buying and selling of fashion companies: Who is there to put up the cash and take a chance on a small or medium fashion business?
Years ago, there were big strategic players like Liz Claiborne Inc. or the Jones Apparel Group looking for apparel businesses to build, but they’re gone now. VF Corp. is still buying (see its $2.1 billion deal for Supreme in 2020), but it’s not looking to rebuild in sportswear. PVH Corp., under CEO Stefan Larsson, appears to be focused on bolstering its Tommy Hilfiger and Calvin Klein brands. Capri Holdings CEO John Idol is looking to buy, but in luxury and is looking particularly at European companies that have at least $500bn in sales and can grow to $1bn.
And many of the fashion-savvy private equity players who have made a lot of money buying and selling apparel businesses are well aware that there are few ready buyers and therefore less willing to invest in the space.
On top of that, it’s still hard to build successfully in an industry that relies on a customer base with such a short attention span.
“In the current environment, it is increasingly difficult to attract quality buyers for small and medium-sized fashion brands, especially if they do not show growth, solid profits and a strong connection with the consumer,” said Elsa Berry, founder of Vendôme Global Partners. . “Many financial buyers now realize that owning fashion businesses can be financially challenging with today’s rapidly evolving and increasingly fickle consumers.”
It’s an environment that separates the winners from the losers: those hoping to scrape together some more cash and those really looking to cash out.
William Susman, managing director of Threadstone Advisors, said: “Strong brands with quality management were able to survive in 2020, thrive in 2021 and will be going full steam ahead in 2022. Investors are hesitant to recommit to fashion apparel, but I think that the best in blue-chip companies will be able to close deals.”