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To IPO, or Not to IPO

BoF weighs up the pros and cons of going public compared to other options for raising capital to fuel growth.
Michael Kors rings the opening bell at the New York Stock Exchange | Photo: Ben Hider/NYSE Euronext via Getty Images
  • Rebecca May Johnson

LONDON, United Kingdom — The initial public offering of stock in Michael Kors, in December 2011, was one of the largest and most successful IPOs in the history of fashion. Shares in the company rocketed up 25 percent on their first day of trading on the New York Stock Exchange, valuing Michael Kors at $3.8 billion, or 44 times its net earnings in the previous four quarters. The listing raised about $1 billion to fund the company's global expansion and, to date, has delivered a 400 percent return to investors.

An IPO works best when a company has a growth story that needs to be financed.

But Kors is not alone. In recent years, a slew of fashion brands have successfully turned to the public markets to raise capital to fuel growth. In June 2011, six months before the Kors IPO, Salvatore Ferragamo raised €380 million (about $429 million) on Milan's Borsa Italiana in exchange for a 23 percent stake in the company, valuing Ferragamo at 24.4 times estimated 2011 earnings. Also in 2011, Prada raised €1.7 billion (about $1.91 billion) by listing 20 percent of its share capital on the Hong Kong Stock Exchange, valuing the company at €9 billion euros (about $10.2 billion), or 23 times 2011 earnings.

However, after several years of blockbuster quarterly results, Michael Kors has experienced the chillier side of the stock market. After narrowly missing sales targets towards the end of 2014 (company wide store sales grew a respectable 16.4 percent, but fell short of the 19 percent forecasted by the company), the market turned on the brand and its share price tanked, wiping 8 percent off the company’s market capitalisation on 4th November, prompting analysts to wonder whether Kors’ once-rapid expansion might have reached a plateau.

Likewise, Prada — which enjoyed a buoyant few years on the Hong Kong stock market after its 2011 IPO, with net profit growth peaking at 45 percent in the financial year ending January 2013 — has seen its shares slip over the last twelve months. Profits slumped by 44 percent in the three months to the end of October 2014, due to declining Asia sales, leading to a 12.5 percent drop in Prada’s stock price in December 2014.

“When things go well, [the stock market] is a fantastic magnifier but when things go bad, it’s better to not be so visible,” commented Mario Ortelli, senior vice president of European luxury at Sanford C. Bernstein, an asset management firm.

Still, many fashion firms choose to go public. “Most private family owned luxury businesses become public at some stage of their development via listing (IPO) or acquisition by larger luxury groups,” states a recent report published by Bernstein. Indeed, the share of luxury brands held by individual entrepreneurs or families declined from 45 percent in 1995 to 30 percent in 2011, according to the report.

"An IPO works best when a company has a growth story that needs to be financed," added Luca Solca, head of luxury goods at Exane BNP Paribas. An IPO can also act as an effective marketing tool. In recent years, pre-IPO buzz around Jimmy Choo and Moncler fuelled extensive commentary in the business press, filling hundreds of column inches.

And, if a brand wants to tap a new market, listing on a stock exchange in the same region can raise the profile of a brand, both in that geography and globally. Such was the case with Prada's Hong Kong listing. In fact, double listings are sometimes used to maximise this effect. Coach, for example, is listed in both New York and Hong Kong.

But, clearly, there are downsides to having a publicly-traded company. First, the visibility of a public listing can be a curse when times are bad. But beyond this, pressure from investors to continually post quarterly growth can also lead to the kind of short-term thinking that has negative effects on the way a brand is managed, devaluing long-term desirability in favour of near-term growth. According to Ortelli, “If you grow too fast there is the risk to overexpose yourself. Growth can be fast because there’s money from the IPO.”

Indeed, this is why some companies choose to remain private. Many luxury goods companies were founded by individual designers, entrepreneurs or families, whose distinct style and history is often at the heart of their firm’s brand, and remaining private can certainly help to safeguard this critical asset, ensuring that the founders retain creative control of their companies and shielding them from the financial demands of external shareholders and the scrutiny of the public markets.

"If you're private, you don't have to make a disclosure to the market about how you are doing," said Ortelli. "If Chanel was not posting incredible results, no one would know. But if they were public and this was known, some customers would say that the brand was not cool anymore — this is a risk."

What's more, today, private companies have been able to achieve significant scale by raising private funding, something that was much harder to do, previously, when there was less money in the hands of private investors. Tory Burch, launched in 2004, was co-founded — and co-funded — by Burch's then husband Christopher Burch, who put $2 million dollars into the venture. Mr Burch also helped to raise a further $10 million from other private investors. This was the brand's only external funding until 2009, when Tory Burch sold a 20 percent stake in the business to Mexican private-equity firm Tresalia Capital.

According to Ms Burch, the brand, which reported revenues of over $1 billion in 2014, mostly funded its own growth. “We had one round of financing [in 2009] and the company has funded itself,” she told BoF’s Imran Amed in a live interview in 2013. “We were profitable in year two. Retail works for us. We’ve been allowed to expand because of the growth of the company. We have no debt and it’s been 100 percent organic… Had we had a lot of debt it would have been a different story and very difficult to get out of.”

Indeed, Burch managed to steer clear of an issue facing many private companies: namely, burdensome debt owed to banks or other lending institutions. However, bringing on private investors can prove problematic as they can often wield significant power over how a business is run. Ms. Burch’s company was sued by her former husband in 2012, who, at the time, owned a 28.3 percent stake in the company. The conflict, which created undesirable publicity around the Tory Burch brand, has since been settled out of court and, in late 2012, Mr Burch sold his shares in the company for $650 million, valuing the Tory Burch business at $3.3 billion and fuelling rumours of a planned IPO.

In the 2013 interview with BoF, however, Ms. Burch insisted that she wished to keep the company private — for now at least. "I've never had that conversation and it's not something I'm interested in any time soon. I'm not saying that my partners aren't interested in that. For me, it's not in the near future."

But ultimately, a company’s performance has much less to do with the source of its funding than the strength of the core business, its managers and its creative team. “The problem with a company is never the IPO,” said Ortelli. “It will be [that] your product is not desirable any more, or that there’s a strategy that was not appreciated by the market, or you have underinvested in marketing.”

The case of Mulberry — the publicly traded British leather goods company, whose share price has dropped by 64.4 percent since its peak in May 2012 — proves the point.

The brand's once explosive growth peaked in the financial year 2010-2011, driven by creative director Emma Hill, whose 'it' bags, such as the Alexa (named after Alexa Chung), tapped a young aspirational clientele. Revenues surged by 69 percent in the year ending March 2011, with pre-tax profit up by 358 percent in the same period. The bags, which drove the core business, had a relaxed, youthful, vintage style and were accessibly priced at around $900, a tier beneath those of high luxury behemoths such as Gucci, Chanel and Louis Vuitton.

Enter CEO Bruno Guillon, who came on board from Hermès in 2012 with a new strategy to take Mulberry upmarket. But the approach had the effect of alienating the brand’s core consumer, as well as unsettling the brand, which never managed to credibly establish itself as a high luxury player. Sales dipped almost immediately, orders were cancelled across Asia — the very geography that the new strategy intended to win over — and a profit warning followed shortly after in September 2012. Emma Hill left in 2013 and between its peak in May 2012 (just after Guillon joined) and its lowest point in February 2014 (just before Guillon left), Mulberry’s share price declined by 72.4 percent, having seen only minimal recovery since then, reflecting — by no means precipitating — the current state of the brand and business.

In November 2014, Mulberry appointed a new creative director, Johnny Coca, formerly head design director for leather goods at Céline, and the market responded with a 2 percent increase in share price. Clearly investors believe there is a lot more work to be done.

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Enjoy 25% BoF Professional membership until December 20