At first glance, apparel company Vince (VNCE) seems poised to become the next Michael Kors (KORS), especially given its 43% first-day return. In comparison, KORS stock gained just 20% in its first day as a public company back in December 2011. But those were very different times. In the two years since then, the markets have gone bananas.
While Vince has some very good things going for it, ultimately, investors will save their cash for Tory Burch. Although the fashion billionaire hasn’t expressed an interest in taking her company public, the mere fact it has three high-profile minority investors indicates it’s only a matter of time.
Here’s why I don’t think Vince will be the next Michael Kors:
In hindsight, KORS took a nearly perfect path to its IPO. In fiscal 2011, it generated $758 million in revenue with $137 million in operating income. It was profitable and growing with 166 retail stores open, comping at 48% annually. In North America, it projected a total of 400 stores over the long term; it currently has 264. Its wholesale business (also growing rapidly) accounted for more than half its total revenue.
Today, wholesale accounts for 47% of overall revenue with retail another 49%, and the remainder from a highly profitable licensing business. It’s perfectly balanced, in great financial shape, and positioned to dominate retail for a very long time.
Vince came to the plate as a much smaller business with $240 million in fiscal 2012 revenue and projected 2013 revenue of $302 million. In terms of profits, it generated $41 million from its operations in 2012 with projected 2013 income from operations of $44 million.
Vince’s margins today are approximately 5 percentage points lower than KORS’ were when it went public. In KORS’ Q2 report, its operating margin was 31%.
Vince has a lot of catching up to do if it wants to be the next Michael Kors.
As part of its separation from Kellwood Company, a St. Louis apparel business controlled by private equity firm Sun Capital, VNCE borrowed $175 million in long-term debt on which it will pay approximately $11.4 million in interest annually. Meanwhile, Michael Kors went public with just $16 million in debt and carries none today.
By the time Vince’s Q4 report rolls around in early February, it will have adjusted EBITDA of approximately $60 million for a debt-to-EBITDA ratio of 2.9 times.
That might not seem like a lot when you’re a manufacturer, but in my opinion it’s pretty high for an 11-year-old fashion brand.
Vince’s strongest attribute is its top management, which — with the exception of two men — is entirely filled by women.