The fashion deal market has been something of a secret and brutal game of musical chairs.
Last year’s rush of big public offerings — from Warby Parker to Allbirds to Rent the Runway — has privately held brands looking to connect with a buyer and also make money.
But the music has stopped for now, and sellers still far outnumber buyers.
WWD broke the news this month that Proenza Schouler, Khaite and ALC have all tested the market or are still looking today. Outdoor Voices was also said to be considering a sale, according to a Bloomberg report. The company did not immediately return questions Monday.
Also said to be on the market are Ganni, Isabel Marant and others, wThe very powerful and high-profile are most 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 the Estée Lauder Cos. Inc., the brand’s beauty licensee. Ford is said to be looking for a deal that would value the company at around $3 billion.
But being a promising clothing brand is not enough – sellers also need to find the right buyer.
Veronica Beard, for example, is said to have cautiously tested the buyout market earlier this year, but ultimately backed out, finding no ready buyer 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 down the line, according to a source.
A Veronica Beard representative declined to comment, but it 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 watching to go public as well, most notably Rihanna’s Savage x Fenty.
But those who aren’t quite ready for the klieg lights of Wall Street are in a tough spot — they have to prove themselves in uncertain times to a small set of potential buyers.
“There has been a renewed focus on sustainable profitability,” said David Munczinski, principal at investor Firelight Capital Partners. “There are deals that will be done before the end of the year, but I think the valuation, the multiple of [earnings before interest, taxes, depreciation and amortization] will reflect the uncertainty of where 2023 goes.
“What you’re seeing now is widespread recognition among investors, especially in the direct-to-consumer space, that sales through the COVID[-19] — the online sales, the marketplace sales, the online wholesale — is unsustainable,” Munczinski said. “It really was a COVID[-19] pound.”
That’s important because acquisitions and acquisitions are priced on more revenue and – sometimes – sales.
But with the market viewing last year’s business as a pandemic anomaly, there is no strong basis on which to base prices.
So Munczinski said there was a lull in dealmaking now that will last into the third quarter as buyers and sellers struggle with valuations.
In a more normal economic landscape, prices could be set on estimates of earnings over the next year – if not the next year of 2023 was a big question mark with the threat of a recession looming, an ongoing war in Europe, inflation sky – high and the world waking up still recovering from the pandemic.
“Let’s assume there’s a recession, things will continue this way,” Munczinski said of the deal market. “Let’s assume there is no recession, you still have to clear through the inventory situation, both at the dealers and now at the brands. It must be resolved. The next shoe to drop is the inventory situation leading to a working capital issue for many of these businesses, so that will be the next area where there is investor scrutiny.”
On top of it all – unusually strong sales last year, a whirlwind of financial problems this year and uncertainty around next year – there is another key factor limiting the buying and selling of fashion companies: Who is there to raise money and take a chance on a small to medium fashion business?
Many years ago, there were large strategic players like Liz Claiborne Inc. or Jones Apparel Group looking for apparel companies to build, but they are gone. VF Corp. is still buying — witness the $2.1 billion deal for Supreme in 2020 — but doesn’t want to rebuild in sportswear. PVH Corp. under CEO 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 looking specifically at European companies that have at least $500 billion in sales and can grow to $1 billion.
And many of the private equity players who know fashion and have made big money buying and selling clothing businesses are well aware that there are few ready buyers and are therefore less keen to invest in this space.
Apart from that, it is still difficult to succeed in building an industry that depends on a customer base with such a short attention span.
“In the current environment, it is more and more challenging to attract quality buyers for small to mid-sized fashion brands, especially if they are not showing growth, solid profits and a strong consumer connection,” said Elsa Berry, founder of Vendôme Global Partners. “Many financial buyers are now realizing that owning fashion companies can be financially challenging with today’s rapidly evolving and ever-more fickle consumers.”
It’s an environment that separates the winners from the losers – those hoping to scrape up a little more cash and those who really want to cash out.
William Susman, managing director of Threadstone Advisors, said: “Strong brands with quality management managed to survive in 2020, thrive in 2021 and will go into overdrive in 2022. Investors are hesitant to get involved in fashion again, but I think the best- in -class companies will be able to get deals done.