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The Top 10 M&A Targets in Fashion and Luxury

As industry growth slows, fashion’s biggest players are looking to grow by acquisition. BoF identifies the top targets in their cross hairs.
By
  • Robin Mellery-Pratt
BoF PROFESSIONAL

LONDON, United Kingdom — The fashion industry is never short of rumours on the next round of designer musical chairs. But as some of the industry's biggest players look to M&A for expansion opportunities in a slowing market, speculation of another kind has dominated the headlines, from reports that Burberry had rejected multiple takeover approaches to LVMH's denial that it had acquired Supreme to Coach's widely covered pursuit of Kate Spade.

Luxury's largest conglomerates are most likely to drive growth through mergers and acquisitions. "For sure, the most active companies in the M&A sphere will be the luxury groups," says Mario Ortelli, senior analyst at Sanford C. Bernstein. "The groups have already created their CAPEX cycles and globally iterated their businesses, so they cannot invest too much in organic growth." Last year, Ortelli told BoF that Richemont and LVMH were both able to make acquisitions worth over €10 billion.

Coach, too, is actively looking at M&A with a view to building an American multi-brand fashion conglomerate, following its acquisition of Stuart Weitzman in January 2015. Coach chief executive Victor Luis has said, "we believe that Coach Inc. can be bigger than the Coach brand. The priority… is terrific brands where we can leverage the Coach know-how, which is especially strong in our ability to develop brands both internationally and domestically."

“Players like Coach are committing to M&A because they probably recognise [the] mature profile [of] their core business. M&A therefore becomes a way to put free cash flow generation to work and improve average growth,” says Luca Solca, head of luxury goods at Exane BNP Paribas.

M&A typically involves a bigger, better funded business buying a controlling stake in a high-potential brand and using its deep pockets, international expertise and existing support network to accelerate growth. But buyers must be careful not to cannibalise their existing businesses, and timing is everything. Indeed, the most attractive targets are traditionally at a stage of development when they no longer need significant investment in brand positioning and customer acquisition, but can still be had for an attractive price.

“But in today’s market, buying something more material is becoming more attractive than buying something because of the brand alone,” says Ortelli.

“Brands will ebb and wane, but if companies can build a platform that can extract meaningful cost synergies from additional targets, there is a path for them to grow irrespective of whether they hit a cycle or not with a handbag,” adds Stephen Boyd of Armistice Capital. “In terms of what makes a good M&A target, where there is a gap in distribution and significant cost savings, the math explodes off the page.”

In a fast-changing world, M&A can also offer buyers the opportunity to swiftly tap emerging consumer demand that’s underserved by their existing businesses. For example, last year, LVMH acquired German luggage maker Rimowa and niche perfumer Maison Francis Kurkdjian, both of which complemented the group’s existing holdings, positioning it to tap fast-growing categories where it was underpenetrated.

Could the same apply to categories like activewear? “There are two trends in the world of fashion that are clear. One is casualisation; the other one is activewear. So, any company that is able to have an iconic position within these two trends would be a very interesting acquisition target for the groups,” says Ortelli.

So which companies are in the crosshairs of fashion’s biggest players? BoF conducted its own internal research and analysis, and spoke with a number of industry experts, to identify the top 10 M&A targets in fashion.

Acne StudiosFounded in 1997 — Revenue: $215 million

The Stockholm-based fashion label has a powerful brand identity, merging Scandinavian style with a fresh, streetwear aesthetic. Acne products are more accessibly priced than traditional luxury labels, offering the luxury conglomerates the opportunity to tap a new market segment outside their core operations. Although Acne Studio sold a minority stake in its business in 2006, impressively the brand’s retail expansion has been completely organic, financed exclusively through the cash flow generated by the business. It is currently stocked in major department stores the world over and operates a network of 50 retail stores in 13 countries. But with revenue just below €200 million ($215 million) in the company’s last fiscal year, Acne is still a comparatively small business with high growth potential.

BurberryFounded in 1907 — Revenue: £2.51 billion ($3.14 billion)

Despite uncertainty around senior roles, and cooling demand for its product, Burberry could be an attractive proposition for LVMH, thanks to its expertise in the digital sphere, an area in which the French luxury group has lagged — and which it is attempting to buoy through the appointment of chief digital officer Ian Rogers. Additionally, Burberry's British heritage is a unique brand proposition, and could sell at a premium due to the lack of large-scale, global British luxury brands.

Speculation surrounding Burberry as a potential LVMH target has only risen following the arrival of Marco Gobbetti, who joins Burberry as chief executive following a successful tenure at LVMH brands Céline and Givenchy. What's more, news that Albert Frère, an independent director of LVMH and long-time business associate of Bernard Arnault, the luxury giant's chairman and chief executive, had built up a 3 percent stake in the company via Groupe Bruxelles Lambert SA further set the stage for discussions between the two companies.

Finally, there have also been reports of conversations between Coach and Burberry, something which was first mooted in October 2016. Luca Solca told BoF at the time: “A merger of Coach and Burberry would primarily be a merger of problems. M&A history in luxury has shown that mergers don't obviously help in regaining brand traction and desirability, while cost efficiency in the face of declining brand momentum are often just a way to run in order to stand still.” So maybe that is one scenario to rule out.

Canada GooseFounded in 1957 — Revenue: $219 million

Despite being valued at about $2 billion following its IPO in March 2017, after a 40 percent jump in share price, the Canadian outerwear specialist’s expansion is “still relatively young,” according to Bloomberg’s Alex Barinka. The company has successfully created a staple fashion product; its coyote backed parkas have built strong traction with the press, influencers and consumers.

Indeed, both investors and analysts are confident in the high growth potential of the brand thanks to strong financials. For the fiscal year ended March 31, 2016, Canada Goose generated revenues of C$290.8 million ($218.5 million), achieving a compound annual growth rate (CAGR) of 38 percent for the past three years. Its net income, which hit C$26.5 million ($19.9 million) last fiscal year, grew at a rate of 196 percent over the same period, according to the IPO prospectus.

Now that Canada Goose is publicly traded, and its original private equity investor Bain has already made its big exit, it would theoretically be easier for a big luxury house with significant capital to buy into its next stage of growth by making an unsolicited bid. The question is whether they are willing to pay a premium over its share price to convince its shareholders to sell.

Kate SpadeFounded in 1993 — Revenue: $1.4 billion

Structurally, Kate Spade offers clear synergies to a business such as Coach, and indeed many analysts believe an announcement regarding Coach's acquisition of the brand is imminent. In 2016, Kate Spade & Company reported net sales of $1.4 billion, with adjusted EBITDA, (earnings before interest, taxes, depreciation and amortization), reaching $259 million.

Combining outlet channels and purchase orders for materials could increase profit margins, and Coach Inc. could repurpose poorly performing Coach retail locations, supporting Kate Spade’s international retail expansion and cutting costs.

“Part of the argument for Kate Spade here in the US, is it is predominately a US brand. Currently 80 percent of Kate Spade’s sales take place inside the US. So if a buyer has infrastructure and expertise in China and other parts of the world, like a Coach, there are sales that can be had immediately, simply by plugging it in to an existing platform,” says Boyd. However, the most attractive efficiency and cost savings may stem from the fact that both businesses are headquartered in New York, allowing for significant G&A (general and administrative) synergies as well.

According to analysts, there is still a chance that Michael Kors, the most likely other bidder, could use stock to purchase Kate Spade — but it is the Coach tie-up that everyone is expecting.

LululemonFounded in 1998 — Revenue: $2.3 billion

Lululemon is about as pure a play you can get for anyone interested in the burgeoning activewear market. A buyer with strong premium branding credentials and experience with scaling brands globally in underpenetrated international markets (particularly China which is experiencing an activewear awakening), could see value in acquiring the business for what is likely to be an attractive price, given its recent lacklustre performance. Both Nike and Under Armour were mooted as possible buyers back in 2015.

Lululemon was a trailblazer in seeing the opportunity in influencing lifestyle trends that dovetailed with the widespread adoption of yoga and Pilates. However, having grown very quickly, the brand’s performance has been shaky, with significant dips in revenues in recent years. This year, the Lululemon stock plummeted almost 23 percent in March.

PatagoniaFounded in 1973 — Estimated Revenue: $700 million

In addition to its potential for growth, Patagonia's “decades” of embedding environmental-conscious practices into its business could bring a wealth of sustainability know-how to a conglomerate group. As the chief executive of Patagonia, Rose Marcario says, “We are living in a world where there are going to be fewer resources, and there won’t always be a wealth of virgin materials. So you have to start working now to figure out how you are going to address those issues.”

As a privately held company founded on the principles of the circular economy, Patagonia is not an obvious acquisition target, and convincing its owners to sell wouldn’t be an easy task. However, its eco-luxury positioning within outerwear makes it an attractive target in the eyes of analysts. Additionally, its appeal in the eyes of consumers spans fashion, as well as consumer trends towards activewear and in this case, conscious consumerism.

PumaFounded in 1948 — Revenue: €1 billion

Kering is not just a potential buyer, it is also a potential seller. Francois Henri Pinault’s decision to stand down from Puma’s board on April 12 2017, prompted further speculation that Puma is on the sales block. Solca described the brand as “on a more promising track,” in December 2016 and Q1 2017 results showed sales had risen by 15 percent to €1 billion (just over $1 billion), year-over-year. As a result, Puma raised its 2017 earnings forecast and , its stock price rose more than five percent to its highest level in almost a decade.

Although Kering's acquisition of Puma was interpreted as the beginning of new lifestyle strategy at the conglomerate, Solca says "synergies between Puma and the group's luxury portfolio were never expected." Since acquiring the brand, the French group has brought on a star designer collaboration, in the shape of Rihanna's Fenty range, and hired a new management team while buying back licenses and improving distribution. A potential buyer may be interested in buying the brand at the beginning of this new upwards trajectory.

Salvatore FerragamoFounded in 1927 — Revenue: €710.2 million ($752.2 million)

One of the last great Italian family businesses not to fall under the control of the three major conglomerates, Salvatore Ferregamo offers Kering or LVMH a rare opportunity potential to add significant revenues in footwear while not cannibalising their existing apparel and leather goods businesses. There would also be significant synergies to be created in distribution, purchasing materials and even production.

The Ferragamo brand also presents a very strong foundation for growth. In his report, ‘Waking a Sleeping Beauty’, Luca Solca wrote “The brand has a brand awareness and desirability surplus in China; it is one of the three most desired brands in France; and it outscores competitors on brand desirability in the US.”

In analysing the company’s growth strategy in February 2017, Solca wrote, “The company has a very strong platform, but has work to do to close the brand awareness and desirability gap with the sector’s leaders.” With sales growth momentum slowing since 2015, who better to guide Ferragamo than the sector’s leaders themselves?

SupremeFounded in 1994 — Estimated Revenue: Unknown

When Kim Jones unveiled his Louis Vuitton x Supreme collaboration on its menswear runway in Paris in January, the press went into overdrive speculating on a possible acquisition. Why else would two companies with such precious brands agree to work together so closely on a collaboration if it wasn't part of a bigger deal? Or at least, that was what people were asking.

Although LVMH denied the reports it was buying Supreme, the 'Chanel of streetwear' is a clear acquisition target. With just 10 stores across North America, Asia and Europe, and no wholesale business, with exception of Dover Street Market, the opportunity for growth is huge. Although global expansion poses something of an existential question for Supreme (how can the label continue to scale without watering down its homegrown cult appeal?), in terms of potential targets, Supreme is supreme.

Tiffany Founded in 1837 — Revenue: $4 billion

In its report on ‘The Meteoric Rise & Fall of American Luxury’, Exane BNP Paribas identified Tiffany as an appealing takeover target due to its “strong brand equity,” and “European luxury business model,” which has insulated it from the “meteoric rises and phenomenal crashes,” of other American fashion and luxury brands and thus, making it a key target for Kering and LVMH. With a market capitalisation of nearly $7.8 billion, a Tiffany acquisition would not be cheap and although the company has struggled to create shareholder value in recent cycles, a number of value-creation opportunities remain untapped, including the development of the brand’s watches offering and splitting out silver and fine jewellery retail models.

Research for this article was contributed by Tamison O'Connor.

The Top 10 M&A Targets in Fashion & Luxury is a BoF Professional report. Look out for our forthcoming BoF Professional reports on The Top 10 Emerging Fashion Takeover Targets and The Top 10 M&A Targets in Beauty.

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