PARIS, France — Sisters Judith Milgrom and Evelyne Chétrite are dressed in high-waisted denim, cotton t-shirts and sharply tailored blazers from Maje and Sandro, as they sit down with BoF to discuss the brands they built from scratch and, together, grew into the affordable luxury giant SMCP (Sandro, Maje and Claudie Pierlot), which is set to list on Euronext in Paris on Friday. SMCP's initial public offering values the business at 1.7 billion euros (about $2 billion) at 22 euros per share, trading in the form of promesses d‘actions, a type of share right.
Chétrite founded the “androgynous yet feminine” Sandro back in 1984. Milgrom founded the “modern, active, effervescent” Maje four years later. In 2009, the sisters bought Claudie Pierlot, a younger, more romantic brand, from its namesake owner. Since then, the rise of SMCP, a global juggernaut with 1,223 stores and sales of 786 million euros ($931 million) last year, has been impressive. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 22 percent to €130 million ($140 million) in 2016.
The company's success is rooted in a formula — like a wave of other French contemporary brands — that blends the affordability and slick, back-end operations of fast fashion with a luxury-like image and customer experience. Each of SMCP's brands has its own Paris atelier and their stores are positioned in high-end spaces on prestigious shopping streets. But speed-to-market is critical: while SCMP brands aren’t operating nearly as quickly as fast fashion giants like Zara, the company can take new items from design to shop floor in about 100 days, about twice as fast as traditional fashion brands (25 new products arrive in stores each week). The company achieves this by sourcing and manufacturing the majority of its clothes in Europe and the Mediterranean and buying others products in Asia, such as cotton t-shirts, that are finished in Europe in accordance to the latest trends.
Affordable pricing or “sensitivity to cost purchase,” in the words of chief executive Daniel Lalonde, is critical. A luxury dress for 3,000 euros may be worn three times at a cost-per-wear of 1,000 euros, while a 300-euro Sandro dress may be worn ten times to work, out at night and across seasons, yielding a cost per wear of 30 euros, he explains in an exclusive interview just days before the IPO.
“What helps is the mixing and matching,” adds Milgrom. “Luxury customers buy our clothes then wear Tank Cartier watches and Dior shoes, in China particularly. It is high quality but at affordable prices, and always on trend. That is why we see a lot of luxury customers in our stores.”
Back when Sandro and Maje started in the 1980s, the brands sold only to department stores and boutiques. The strategy helped the founders understand the product and build awareness of their affordable luxury offering. But nearly 20 years later, they pivoted their approach and launched their own retail stores. Maje opened on the Left Bank in the Sixth Arrondissement in 2002, while Sandro opened in the trendy Marais area of Paris in 2004, ending both brand's reliance on wholesale.
The benefits of the retail-led model were manifold. “We’re allergic to the traditional way of doing wholesale,” Lalonde explained to BoF earlier this year. “Ninety-four percent of our business is done through direct retail [and] there are big, big advantages of being a retail pure player today. You control your distribution, you control your commercial policy, you can replenish the stores quickly. We know what sells right away.”
After two decades of business, Chétrite and Milgrom also sought investment to take their brands global. They found a partner in L Capital, LVMH’s private equity arm, who took a 51 percent stake in the business in 2010 and who, along with private equity firm Florac, were key to SMCP’s understanding of the luxury sector, Chétrite says. As is typical of private equity holding cycles, L Capital’s sold its stake to investment firm KKR in 2013. “They bought the structure to grow,” she says, and were instrumental in the hiring of chief executive Lalonde.
Three years later, after having doubled sales, KKR sold most of its holding to Chinese textile firm Shandong Ruyi, who took a 65 percent stake in the business for 1.3 billion euros including debt, according to a Bloomberg report at the time. While Shandong Ruyi supplies a small amount of fabric for Sandro Homme suits, the investment was not about synergies. The Chinese firm is “a long term investor” says Lalonde, with five members on the board, along with Chétrite, Milgrom, Lalonde and four independent members including Patrizio di Marco, the former chief executive of Gucci. The textile firms knowledge of Asia is most valuable, as SMCP has ambitions to expand heavily in the region.
KKR retained a 9.8 percent stake, which it will cash out with a hefty profit on Friday. When the firm purchased its stake in 2013, SMCP was valued at 650 million euros, versus 1.7 billion euros today. While other co-investors will also exit, Shandong Ruyi will remain a majority shareholder in the company at 55 percent, and the founders and management retain their stake of around 10 percent, worth around 170 million euros.
“If you’re going to make a considerable push into retail and expand your footprint, the IPO has to be around volume and growth,” says John Guy, head of European luxury at Mainfirst Bank. “SMCP have very good brand awareness, but it’s a pure growth story rather than a margin story,” says Guy.
The market remains fiercely competitive, and analysts are cautious about SMCP’s growth on the public market. “The main issue is to find the right pace of development of store expansion for the brand and at the same time keep up the brand desirability in a part of the market in which competition is very high," says Mario Ortelli, head of luxury goods at Sanford C. Bernstein. Opening too many costly stores can compress margins if there is a slow down in sales over time, he adds. And responding to the fashion cycle means there will always be the relentless need for on-trend products.
Firstly, SMCP plans to reduce its 300 million euros debt to cut the high interest rates on the bonds it is are repaying. Then the company has its eyes on China, where Lalonde says it can quadruple the number of stores to equal its presence in France, its largest market, to tap the growing number of middle-class shoppers. Sales growth in affordable luxury outperformed most other sectors last year, driven particularly by Chinese, according to the McKinsey Global Fashion Index.
“Yes, we have that ambition, but as important is our development in Europe, Italy, Spain, Germany and the UK,” Lalonde says, adding that he has plans for openings in Japan and is looking at Latin America and South-East Asia, too. He also aims to grow Sandro Homme from 20 percent to 35 percent of Sandro’s sales in the next 5 years, while also the doubling overall accessories and shoes business to 15 percent.
Over the longer-term, SMCP will also consider purchasing other brands that would “add value to our portfolio,” Lalonde continues. “The vision is to become a global leader in accessible luxury. We are in early stages of growth of all the brands. There’s so much to do, so much runway ahead of us: digital, e-commerce, accessories. We’re just at the beginning of this chapter.”