by Will Ashworth | January 2, 2014 11:13 am
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.
When more 85% of your product is sold to women, it makes good business sense to have executives in place who actually buy the products. While retail has always been fairly liberal when it comes to promoting women up the ranks, it’s refreshing to see that Vince has made it so widespread.
More importantly, VNCE has hired people — men and women — who appear to have the experience necessary to take the brand to the next level. I’m not suggesting that will make it the next Michael Kors, but it certainly has the opportunity to become a decent-sized specialty retailer.
Its big Achilles’ heel is its men’s products, which have been around since 2007 and yet represent a small part of Vince’s overall business. Plans are afoot to add a men’s shoe line in 2014 while also elevating the men’s collection from also-ran.
That’s easier said than done.
Plenty of good retailers have stumbled trying to be unisex when they should have just picked one and stuck to their knitting. Trying to please both sexes often results in a loss of focus. If Vince wants to be the next Michael Kors, it can’t afford any mistakes, big or small.
This decision to push further into men’s wear could be VNCE’s undoing.
Sun Capital was smart to float Kellwood’s best business at a time when the IPO market was hot. It paid $544 million (also assumed $411 million in debt) for Kellwood back in 2008. With the underwriters exercising the over-allotment, it sold 1.5 million shares for $30 million and is sitting on another 24.7 million shares valued at $745 million as of Dec. 30.
Sun Capital will also receive approximately $172 million from VNCE for tax savings at three levels of government from its separation. Add that up, and Sun has just short of $1 billion in hand with its other Kellwood businesses likely to be sold. It has already doubled its money in five years with some gravy still to come.
Well played, boys.
As for VNCE stock, I think it will deliver double-digit returns in 2014 … but so will KORS. In my opinion, Vince isn’t the next Michael Kors. If anyone has that chance, it’s Kate Spade (FNP), and I’m even skeptical there.
Most of the easy money in VNCE has been made already. If you can wait for it to grow itself into a bigger player in 24 to 36 months — it might be worth a flyer.
But then again, why not take that chance with KORS?
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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