Fashion’s dealmaking dilemma, few buyers, many sellers – WWD

The deal market in fashion was something like a secret and brutal chair game.

Last year’s rush of major consumer IPOs — from Warby Parker to Allbirds to Rent the Runway — has private brands looking to connect with a buyer and make money, too.

But the music has stopped for now and there are still far more sellers than buyers.

Khaite Resort 2023

Khaite, resort 2023

Thanks to Khaite

WWD released the news this month that Proenza Schouler, Khaite and ALC have all tested the market or are still looking. Outdoor Voices is also considering a sale, according to a Bloomberg report. The company did not immediately answer questions on Monday.

They are also said to be on the market Ganni, Isabel Marant and others, wThe very strong and high-profile people are likely to connect with potential buyers who are at least willing to listen, as Tom Ford seems to have done through his reported conversations with Estée Lauder Cos. Inc., the beauty licensee of the brand. Ford would be looking for a deal that would value the company at about $3 billion.

But being a promising brand in clothing is not enough – sellers also need to find the right buyer.

Tom Ford Mens Fall 2022

Tom Ford, Mens Fall 2022

Thanks to Tom Ford

Veronica Beard, for example, was said to have tentatively tested the buyout market earlier this year, but eventually pulled out, finding no willing buyer willing to pay for a brand that is growing.

That leaves the company bidding its time, trying to keep growing and watching the IPO market down the line, according to a source.

A Veronica Beard representative declined to comment, but that would put the brand as part of the next wave of fashion IPOs — when Wall Street is willing to take another look at the industry. There are others waiting and looking to go public as well, most notably Rihanna’s Savage x Fenty.

But those who aren’t quite ready for the kliglights on Wall Street are in a difficult position – proving themselves to a small number of potential buyers in uncertain times.

“There is a renewed focus on sustainable profitability,” said David Munczinski, principal at investor Firelight Capital Partners. “There are deals that will be closed before the end of the year, but I think the valuation, the multiple of [earnings before interest, taxes, depreciation and amortization] will reflect uncertainty about where 2023 is headed.

“What you’re seeing now is the widespread recognition among investors, especially in the direct-to-consumer space, that selling through COVID[-19] — the online sales, the marketplace sales, the wholesale sales that are done online — are unsustainable,” Munczinski said. “There really was a COVID[-19] bump.”

This is important because acquisitions and buyouts are priced at a multiple of the profit and – sometimes – the turnover.

But since the market saw things like a pandemic anomaly last year, there isn’t a strong foundation to base prices on.

So Munczinski said there is now a pause in deal making that will last into the third quarter as buyers and sellers struggle with valuations.

In a more normal economic landscape, prices could be set based on earnings expectations for the coming year – if the next year of 2023 weren’t a big question mark with the threat of recession, ongoing war in Europe, skyrocketing inflation – high and the world is still waking up to the pandemic.

“Let’s assume there is a recession, things will continue this way,” Munczinski said of the deal market. “Let’s assume there is no recession, you will still have to clean up the inventory situation both at the retailers and now at the brands. That needs to be worked out. The next shoe to fall is the inventory situation which is leading to a working capital issue for many of these companies, so that’s going to be the next area investors are looking at critically.”

In addition – unusually strong sales last year, a whirlwind of economic woes this year and uncertainty around next year – there is another key factor limiting the buying and selling of fashion companies: Who is there to collect the money and take a shot at a small to medium sized fashion company?

Years ago there were big strategic players like Liz Claiborne Inc. or Jones Apparel Group who were looking for clothing companies to build on, but they are gone. VF Corp. still buys — judging by the $2.1 billion deal for Supreme in 2020 — but has no plans to rebuild sportswear. PVH Corp. under Chief Executive Officer Stefan Larsson appears to be focusing on fueling its Tommy Hilfiger and Calvin Klein brands. Capri Holdings CEO John Idol wants to buy, but in luxury, and he’s mainly looking at European companies with revenues of at least $500 billion and that could grow to $1 billion.

And many of the private equity players who know fashion and have made a lot of money buying and selling clothing companies are well aware that there are few willing buyers and so are less eager to jump into an investment in the space. .

In addition, it is still difficult to build successfully in an industry that relies on a customer base with such a short attention span.

“In today’s environment, it is becoming increasingly difficult to attract quality buyers to small to medium-sized fashion brands, especially if they do not show growth, solid profits and a strong connection with consumers,” said Elsa Berry, founder of Vendôme Global Partners. “Many financial buyers are now realizing that owning fashion businesses can be a financial challenge as today’s consumers evolve rapidly and become increasingly fickle.”

It’s an environment that separates the winners from the losers – those who hope to raise a little more money and those who really want to make money.

William Susman, managing director at Threadstone Advisors, said: “Strong brands with quality management were able to survive in 2020, thrive in 2021 and will go into overdrive in 2022. Investors are hesitant to get back into fashion, but I believe the best in-class companies will be able to get deals done.”

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