For the fashion industry — and footwear in particular — 2019 has yet to bring any of the billion-dollar-plus acquisitions that we saw in 2017 (Jimmy Choo, Kate Spade & Co.) and 2018 (Versace, Yoox Net-a-Porter SpA). But with a few months left in the year, there’s still time for deals to be made.
Last week, FN’s sister publication WWD reported that Dr. Martens is on the sales block, and according to one financial industry source, the British brand is looking for a valuation of 1.2 billion pounds (about $1.5 billion USD). The boot maker has made significant strides since it was bought by the private equity firm Permira in 2014 for 300 million pounds, and in August reported annual revenues of 454.4 million pounds, up 30% year-over-year.
The reported valuation would be just over 14 times the company’s earnings before interest, taxes, depreciation and amortization (up 70% last year to 85 million pounds), which the source called “ridiculously high.” For its owners, it would represent returns of four times its investment in less than six years. (Permira did not respond to FN’s request for comment.)
Douglas Hand, partner at the fashion law firm HBA, said a valuation like that would indeed be high, but, “That said, there are some real legacy elements to the brand that make it special. Notably its iconic relevance for decades that has seemed to be beyond trend/fashion cycles and its protectable trade dress (back tab, yellow welt stitching).”
Dr. Martens has also been successful in evolving to meet consumers where and how they shop, growing its e-commerce business by 67% last year; expanding into categories like sandals and children’s boots; and investing in its vegan range of footwear, growing it “multiple hundreds of percent” in recent years, according to CEO Kenny Wilson.
With this in mind, said Gilbert Harrison, chairman of Harrison Group Inc., a consulting firm specializing in the retail and consumer industries, Permira’s reported goals may not be too far of a reach. “Dr. Martens is a very good company, and I think in today’s world, it could have a lot of potential. So I would not at all be surprised about that.”
(For comparison, Michael Kors — now Capri Holdings Ltd. — bought Jimmy Choo for $1.2 billion at a multiple of 17 times EBITDA, which analysts at the time called “rich,” while Coach — now Tapestry Inc. — acquired Kate Spade for $2.4 billion at a multiple of nine times EBITDA.)
In June, Bloomberg reported that Permira was considering a U.S. IPO for Dr. Martens and had tapped Goldman Sachs Group and Robert W. Baird & Co. to explore its options, though none of the parties commented on the rumor.
The Cole Facts
On Monday, though, another footwear brand confirmed that it is throwing its name into the IPO ring: private-equity-owned Cole Haan announced that it has confidentially submitted a draft registration statement with the Securities and Exchange Commission.
The company, which Apax Partners bought from Nike in 2013 for $570 million, confirmed two months ago that it was preparing to go public, though the timing and size of the offering are still undisclosed.
“Our management team is confident in the opportunities we have created for the Cole Haan brand and our business globally,” said Cole Haan CEO Jack Boys in an August statement. “Based on the momentum we have generated in the business and the opportunities we believe are before Cole Haan, we have determined that now is the time to prepare for an initial public offering of the company’s shares.”
In the fiscal year ended June 1, the company grew revenue 14% to $687 million, while adjusted EBITDA increased 56% to $95.3 million. The brand has seen success with its comfort-focused innovations, including the Zerøgrand line of cushioned dress and lifestyle shoes and its recently launched Grand Ambition collection, developed in collaboration with the University of Massachusetts Amherst’s Biomechanics Laboratory.
Still, according to Jane Hali, CEO of the retail investment research firm Jane Hali & Associates, Cole Haan isn’t the hot brand today that Dr. Martens is. “Yes they have sneakers, comfort shoes and boots — but they are more ‘dressed-up.’ We don’t feel it is hitting the Gens Y and Z audience.” The core of the footwear business today is sneakers, she added, and “a sneaker buyer is looking for a real sneaker.”
Going public isn’t the only option available to Cole Haan: Apax Partners may also be open to selling to a strategic buyer, and WWD reports that it is pursuing just such a “dual-track process,” even as it focuses chiefly on preparing for an IPO. Cole Haan declined to comment further on the IPO announcement or the possibility of an acquisition.
“In many cases, a company files for an IPO, but under the right circumstances, they would sell it before the IPO because there’s public information available,” said Harrison. “Especially with the IPO market being the way it is, I would not be surprised that there is a dual track.”
A Market in Flux
Earlier this month, Goldman Sachs published a research note saying that shares of newly public companies are performing at their worst level since at least 1995. The slump has been driven by increased skepticism toward unprofitable Silicon Valley unicorns like Uber and Lyft — a consequence, in part, of WeWork’s disastrous failed IPO — but analysts say that will likely put a chill on the overall IPO market for the remainder of the year.
Cole Haan and Dr. Martens may each be better served, then, by finding a strategic buyer, said William Susman, managing director of Threadstone Advisors, a financial advisory firm. “For brands of this high quality, a sale to a strategic buyer would be the preferred path. They can offer the global resources for each to grow. The IPO market is fickle right now and private equity is less enthusiastic for wholesale-driven businesses.”
Dealmakers will also be factoring in the uncertain macroeconomic environment, including concerns about a potential recession and the ongoing disruption in the retail sector, which has led to store closures and high-profile bankruptcies. Likely even more important to potential buyers, though, is the issue of U.S.-China tariffs, said Hand. “Exposure to China and high tariffs could really damper the prospects of a sale.”
The most recent batch of tariffs — the first set of the fourth tranche — took effect on Sept. 1, levying an additional 15% tax on $112 billion worth of Chinese imports, including more than two-thirds of China-made shoes. The next part of the fourth tranche is planned to go into effect Dec. 15, affecting about $160 billion in imports, including the remaining share of footwear.
For private equity owners that aren’t in a rush to offload a brand, waiting out this uncertainty could also be the preferred option.
While there were reports in May that U.K.-based shoe brand Kurt Geiger was in preliminary sale talks with several American companies, including Steve Madden, Tapestry and Capri Holdings, CEO Neil Clifford said in an interview last month with FN that he doesn’t anticipate the brand changing hands “in the immediate future.”
“We’re a private equity-invested company,” he said. “It’s not a secret that one day we will change owners, but I don’t see that in the immediate future. We’re focused on growing our brands — growing sales and profits of the company of course — but as importantly now growing the brand awareness, building our community outside of Europe.”
Private equity firm Cinven bought Kurt Geiger in 2015 for 245 million pounds (about $396 million) from now-defunct brand management company The Jones Group, and has focused on relaunching it in the U.S., rolling out to 100 department stores and online destinations last July.
An eventual acquisition, said Clifford, “[Is] not a focus for us. It’s almost an outcome of our jobs, not part of our jobs. Our jobs are to grow the company, grow our brands, grow internationally. Almost 30% of our business is international, and we want that to be north of 60% in the next three to four years, so we’ve got plenty of work to do.”