The fashion bargain market has been something like a secretive and brutal game of musical chairs.
Last year, the rush of initial public offerings from major consumers — from Warby Parker to Allbirds to Rent the Runway — led to private labels looking to get in touch with a buyer and cash in, too.
But the music has stopped, for now, and the sellers still far outnumber the buyers.
WWD announced this month that Proenza Schouler, Khaite and ALC have all tested the market or are still looking today. Outdoor Voices was also reportedly considering a sale, according to a Bloomberg report. The company did not immediately return the queries on Monday.
Also said to be on the market are Ganni, Isabel Marant and others, wwhile the loudest and most prominent are the most likely to connect with potential buyers least willing to listen, as Tom Ford seems to have done through his reported interviews with Estée Lauder Cos. Inc., the brand’s beauty licensee. Ford is reportedly seeking a deal that values the company at around $3 billion.
But being a promising clothing brand is not enough: sellers must also find the right buyer.
Veronica Beard, for example, would have gently tested the buyout market earlier this year, but eventually pulled out, finding no buyers willing to pay for a growing scale brand.
This forces the company to bide its time, looking to continue growing and keeping tabs on the IPO market down the line, according to a source.
A rep for Veronica Beard declined to comment, but that would put the brand under the next wave of fashion IPOs — whenever Wall Street is ready to take another look at the industry. There are others also waiting and watching to be released, in particular Rihanna’s Savage x Fenty.
But those not quite ready for the klieg lights of Wall Street are in for a tough spot — they have to prove themselves in uncertain times to a small group of potential buyers.
“There has been renewed interest in sustainable profitability,” said David Munczinski, principal at investor Firelight Capital Partners. “There are deals that will close 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 the future of 2023.
“What you’re seeing now is widespread recognition among investors, particularly in the direct-to-consumer space, that sales through COVID[-19] — online sales, marketplace sales, wholesale sales done online — are not sustainable,” Munczinski said. “There really was a COVID[-19] to bump.”
This is important because acquisitions and buyouts are valued on a multiple of earnings and – sometimes – sales.
But with the market viewing business last year as a pandemic anomaly, there is no solid basis on which to base prices.
So Munczinski said there is now a pause in trading that will last until the third quarter as buyers and sellers grapple with valuations.
In a more normal economic landscape, prices could be set on earnings estimates over the next year – if next year 2023 wasn’t a big question mark with the threat of a looming recession, a ongoing war in Europe, skyrocketing inflation – high and the world is still waking up from the pandemic.
“Suppose there is a recession, things will continue like this,” Munczinski said of the deal market. “Assuming there is no recession, you will still have to sort out the inventory situation, both at retailers and now at brands. It has to work out. The next shoe to drop is the situation at inventory which results in a working capital problem for many of these companies, which therefore becomes the next area where investors are scrutinized.
On top of all of this – unusually strong sales last year, a whirlwind of economic difficulties this year, and uncertainty around next year – there is another key factor limiting the buying and selling of businesses. fashion: Who is there to unlock the money and try their luck in a small or medium fashion business?
Years ago, big strategic players like Liz Claiborne Inc. or Jones Apparel Group were looking to build apparel companies, but they disappeared. VF Corp. still buying — evidenced by its $2.1 billion deal for Supreme in 2020 — but not looking to rebuild in sportswear. PVH Corp. under Chief Executive Stefan Larsson, appears to be focused on supercharging its Tommy Hilfiger and Calvin Klein brands. Capri Holdings CEO John Idol is looking to buy, but in luxury and is particularly targeting European companies that have at least $500 billion in sales and can reach $1 billion.
And many private equity players who know fashion and have made a lot of money buying and selling clothing businesses are acutely aware that there are few ready buyers and are therefore less inclined to get into an investment in space.
On top of that, it’s still difficult to successfully gain a foothold in an industry that depends 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 fashion brands, especially if they are not showing growth, strong profits and a strong connection with consumers. “, 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 changing and increasingly fickle consumers.”
It’s an environment that separates the winners from the losers – those hoping to make more money and those really looking to make it.
William Susman, managing director of Threadstone Advisors, said: “Strong brands with quality management have been able to survive in 2020, thrive in 2021 and will go into overdrive in 2022. Investors are reluctant to re-engage in fashion apparel , but I believe that the best in -class companies will be able to close deals.