IPOs Reigniting Wall Street’s Love of Fashion
Big changes across the consumer space are being mirrored in the investment world.
For years, fashion couldn’t get mugged on Wall Street as retailers struggled with the perception that there were simply too many stores fighting a losing battle with Amazon online.
Now public market investors are rushing headlong into a flurry of initial public offerings from some of the sector’s buzziest names and also taking a closer look at establishment companies that changed their tack during the pandemic.
What a difference a year makes.
While COVID-19 sent a host of big-name players to bankruptcy court a year ago, the hot stock market is coaxing the next crop of fashion companies to Wall Street with IPOs.
The market has seen offerings this year from resellers Poshmark Inc. and ThredUp, Jessica Alba’s The Honest Co., scrubs brand Figs, Dr. Martens, Mytheresa and more.
Up next is brand licensing powerhouse Authentic Brands Group, which should start trading soon. There’s a host of other big names on deck, including Rent the Runway and Warby Parker (which have both said they filed their IPO paperwork confidentiality), Allbirds (which is rumored to have done so) and Kate Hudson’s Fabletics (which is said to have hired banks to start the process). Ermenegildo Zegna Group is also expected to go public this year via a SPAC deal.
There is real change in the air. And the companies coming to the market are drawing more investors to consumer and retail.
The pie at long last seems to be getting bigger — with both investors and consumers wanting more.
“There are very few silver linings with the pandemic, but there have been a couple and one of them is this explosion of technological change that is driving a rebirth in consumer activity,” said Gregg Nabhan, chairman of Americas equity capital markets and head of origination at Bank of America. “This is allowing smaller companies to grow and get bigger at a much more rapid pace, which then allows them to go public earlier.
“People are so much more comfortable shopping online, getting delivery online,” Nabhan said. “As fast as e-commerce growth was in the previous 20 years, it’s like the pandemic made it exponentially faster. The question now is, ‘How fast can they get to $500 million, to $1 billion of EBITDA?’ That’s why the pool of capital is getting bigger.”
While shares of the average IPO are up 9 percent year to date, Nabhan said those of consumer and retail IPOs are up by 20 percent.
“There will likely be a lot more companies that go public than anyone would have imagined,” he predicted. “The market for IPOs in the consumer space is as strong as I’ve ever seen it in my 35 years in the industry.”
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At the same time, the best players in retail and fashion’s old guard have made major changes during the pandemic, often cutting workforces by 15 percent, making supply chains more agile and doubling down on data as they reoriented toward e-commerce.
Those changes — and the awakening that prompted them — might be just enough for fashion companies to finally get their groove back and even slide into a new category.
“The e-commerce companies are really getting traction among investors,” said Anand Kumar, an analyst at Coresight Research who has written about fashion IPOs.
And after a year of reinvention, more companies are starting to qualify as internet players rather than simply retailers or wholesalers.
“Big brands are now moving into the e-commerce space,” Kumar said. “Most of these big companies like PVH and Hanesbrands, they’re playing to expand their e-commerce penetration to 40 to 50 percent.”
Along the way, they’re becoming much more modern, automating fulfillment centers and taking other steps to compete online, he said.
This at long last is helping the industry reconnect with shoppers.
“Consumer spending has been strong for a decade,” said consultant Greg Portell, lead partner in Kearney’s global consumer practice. “Retail hasn’t been able to keep up — that story is changing.
“Three years ago, the investment thesis was about transformation and it was about restructuring and reshaping,” Portell said. “More often than not, the story around retail [now] is, ‘How do you consolidate gains? How do you grow share? How do you exceed expectations?’ Not, ‘How do you shut stores? How do you change associates?’
“The era of restructuring has given way to an era of modern retail,” he said.
While it’s an era that the old guard is trying to rapidly adjust to, it’s home turf to the Warby Parkers and Rent the Runways of the world that have long been buzzed about and hailed as the next big thing, but have yet to reveal their finances to the world.
How forgiving investors will be remains to be seen.
Venture investors are generally willing to trade profit for growth — if there’s enough growth. The public market crowd can also put up with losses from a new idea, but is less tolerant.
The new entrants at least should be able to get off to a good start since the money they raise won’t come with interest payments and a due date.
“It’s nice to see these growing companies looking to equity funding over debt funding because it changes the growth algorithms in a way that is much more sustainable,” Portell said.
But money raised in an IPO will also come with a load more transparency — including quarterly reports and regular pubic grillings by analysts that will be a new test to many management teams. It’s a learning curve that even tech giants like Facebook and Snap had to go through after their IPOs.
“You need to have a maturity when you come to market,” Portell said. “That’s been the biggest lesson from all these companies [that have gone public recently]. Start-ups are chaotic places, that’s where they get their magic. You don’t want chaos in your organization if you’re a public company.”
Even as the IPOs and the still-strong consumer draw more dollars back to the retail and fashion space, there’s going to be competition for investor love.
“As new companies become the shiny new object to a public investor, they obviously have to choose now where they want to invest,” said Simeon Siegel, stock analyst and managing director at BMO Capital Markets. “At the end of the day, any given fund has a limited source of funds to deploy.”
But Siegel said the establishment players are on the upswing, after a long period when the general sentiment was that retail would be eaten by Amazon.
“I firmly believe COVID-19 saved retail,” said Siegel, referring to the nudge and opportunities the pandemic gave to retail management teams ready to transform their operations.
“For those that took advantage [and changed their approach], retailers can actually be in a much better spot,” Siegel said. “Some of these businesses are simply structurally better off.”
Right now, Siegel said the consumer is fortified by government stimulus and freer to go to stores just as supply chain bottlenecks are hurting supply and ratcheting up prices.
In short, consumers want to spend, and are able to spend, but have nothing to spend it on, he said.
And so, for both newcomers and the establishment, the getting is good is at the beginning of the new modern retail era — the question is, just how long with that last?