As consumer preferences change, the luxury fashion industry is seeking to stay ahead of the curve, in large part through mergers and acquisition activity. Tracy Bacigalupo and Elnaz Zarrini of Morrison & Foerster look at recent M&A trends.
Who are the main players?
In the recent past, the age of the average luxury shopper has fallen from 48 to 34 years old and is expected in the near future to be even younger. As new generations of consumers obtain significant wealth earlier in life, they are redefining what luxury means. New luxury consumers seek out singular experiences more than iconic goods, and are upending traditional sales channels through the use of digital technology.
Traditionally, luxury fashion has been the haven of three of the largest European fashion conglomerates — LVMH, Kering and Richemont — along with independent brands such as Chanel, Giorgio Armani and Burberry. More recently, U.S.-based companies like Coach Inc. and Michael Kors Holdings have made strategic moves. In 2017, Coach expanded through the acquisition of Kate Spade and Stuart Weitzman, renaming itself Tapestry Inc. Also in 2017, Michael Kors acquired Jimmy Choo, and, in September 2018, announced the purchase of Versace. Add in competition from China-based companies such as Fosun International and Gansu Gangtai Holding, along with the usual private equity firm players, and it’s clear that the M&A trend is in season.
Consequently, it has become incumbent upon both luxury fashion houses and private equity firms to familiarize themselves with the particulars of acquisitions involving luxury groups. While acquisitions in the luxury fashion industry remain risky, the industry seems to have reached a general consensus on a few notable strategies. First, buyers should target younger, less costly companies with sufficient brand loyalty but also room for growth. Second, buyers should ensure that the target businesses will prosper under new ownership and be part of a greater strategy. Finally, the key to success lies in the ability of the buyer and target to synergize and integrate different cultures and value systems, taking the best of both to new heights.
With online sales set to account for 25 percent of the overall luxury market by 2025, according to Bain & Co., we can expect to see an increase in M&A deals with e-commerce companies as luxury retailers continue their rapid advance into e-commerce. Of 24 retail consolidation deals occurring in 2017, 14 retailers that sell exclusively online were acquired. Notably, Swiss luxury conglomerate Richemont increased its minority stake of 25 percent and acquired all of Yoox Net-a-porter, the leading fashion e-commerce retailer.
In addition, Nordstrom acquired BevyUp, a developer of digital selling tools allowing Nordstrom stylists to recommend hand-picked items to customers through Nordstrom’s new app, directly appealing to the demand for exclusive personalized service by the new generation of shoppers. Phillips Van Heusen, owner of Calvin Klein and other iconic brands, purchased True&Co, a vertically integrated e-commerce start-up in 2017.
And finally, Polyvore, a social commerce web site similar to Pinterest, was acquired by Ssense, a fashion web site based in Montreal. Ssense discontinued Polyvore’s brand and web site, but gained valuable industry intel from Polyvore’s users’ data.
Buyers may also acquire channels to international audiences through the acquisition of international targets or domestic targets with international businesses. According to an August 2017 report by McKinsey & Co., the Chinese market is particularly attractive, accounting for one-third of global luxury purchases - Chinese enterprises spent $92 billion on foreign brands in just the first four months of 2017, and Chinese luxury consumers accounted for more than $7.4 billion in annual spending according to the August report from McKinsey & Co. In 2017, the $1.8 billion Japanese retail giant, Adastria, acquired California luxury brand Velvet LLC, solidifying its North American footprint and establishing a point of contact with the region’s luxury shoppers. Cofounder and chief executive officer of Velvet LLC, Henry Hirschowitz, commented that while Velvet will support Adastria with its presence in the North American market, Velvet also stands to gain from Adastria’s extensive resources and knowledge in retail and the online market.
Finding the Right Fit
Because the value of an acquired asset may change over time, it’s up to the acquirer to inject opportunity into the brand to drive growth and incremental synergies. Tapestry Inc.’s acquisition of Kate Spade projects synergies of up to $115 million in 2019, in addition to expected benefits from increases in sales and lower tax rates.
The $58 billion merger between eyewear giants Luxottica and Essilor, recently cleared by the Federal Trade Commission and European Commission, is an example of vertical integration; the world’s largest eyeglass frame manufacturer and lens manufacturer, respectively, along with their direct-to-consumer e-commerce web sites, such as Coastal.com, EyeBuyDirect and FramesDirect, should give the resulting entity significant control over its supply chain.
Despite sound numbers and strategy, the acquisition of a fashion company can result in failure if its products simply do not sell. For example, Wolverine Worldwide purchased boat shoemaker Sperry and other brands, including Saucony, Keds and Stride Rite for $1.2 billion in 2012, with a plan to reach $4 billion in sales by 2018. Instead, sales of its footwear products have come up short of the company’s revenue guidance for many years, and Wolverine Worldwide has tried to sell several brands this year.
In the last decade, Business Insider reports that of the 20 largest private equity acquisitions in the apparel space, five have been restructured or have gone bankrupt due to their debt load. Payless Inc., for example, which was acquired in 2012 in a leveraged buyout, filed for Chapter 11 bankruptcy in April 2017.
Tying It All Together
While many view the consolidation of luxury players as inevitable, potential buyers should not rush into acquisitions without a careful deal-by-deal analysis. Facing massive industry disruption and hype, both strategic and PE firms’ buyers must objectively examine target valuations. While the same principles concerning profitability apply to private equity portfolio company acquisitions, such firms must also scrutinize valuations and earnings before interest, tax, depreciation and amortization, or EBITDA, multiples as being linked to the duration of their investments in such brands.
Even though the evaluation of luxury M&A deals cannot be reduced to a mathematical formula, potential buyers should consider the factors listed above, in particular, to look for targets with room for development, integration potential and a role to play in the buyer’s acquisition strategy.
Tracy Bacigalupo is a partner in the corporate department of Morrison & Foerster, and Elnaz Zarrini is an associate in the corporate department in Morrison & Foerster’s New York office.
This article was first published on WWD.com in December 2018