The world’s more polarized than ever — and it’s not just politics.
Wall Street is also going for the extremes.
It’s not a surprise companies and brands that are ultra chic, ultra inexpensive or ultra sporty are getting all the love from investors and scoring the highest valuations. Luxury names have always commanded stronger multiples given their sky-high margins. But the high-end is now being valued side by side with the discount pricing crowd and the brands leading the active charge as investors continue their migration away from the middle.
When investment bankers put price tags on companies, they look at enterprise value, which includes the value of all the company’s outstanding shares and debts, and earnings before interest, taxes, depreciation and amortization, or EBITDA. It’s a big-picture measure that incorporates all of the money a company has taken from investors and all the cash that flows through the business.
There are plenty of nuances. A drop in EBITDA can suddenly boost a valuation if investors are understanding and companies typically need to be compared with others in a similar line of business. But an enterprise value of 10-times EBITDA or higher has generally been seen as a solid valuation.
A WWD study of valuations across the global fashion market found 25 prominent companies that made the mark.
Leading the pack is Stitch Fix Inc., which is known for its AI savvy and is something of tech-fashion hybrid. The company is valued accordingly — with a multiple of 44.6-times EBITDA.
The valuations reflect the companies’ prospects for growth.
Canada Goose’s sales shot up 54.4 percent to 799.1 million Canadian dollars over the past 12 months, giving the parka brand plenty room to grow and the momentum to keep pushing higher. Gucci parent Kering is much bigger, with 13.67 billion euros in revenues, and not growing as fast, but still expanding at a very impressive 26.3 percent. Burberry’s revenues fell 6.3 percent in the most recent 12 months to 2.69 billion pounds as chief executive officer Marco Gobbetti and designer Riccardo Tisci seek to elevate the brand’s positioning.
Investors are also willing to pay up to get into the active trend one way or another. Lululemon Athletica Inc. is growing strongly and Under Armour Inc. is still finding its way, but both have multiples of about 25-times.
And ultra value — a category that for years has been taking market share — remains strong with Burlington Stores Inc., Ross Stores Inc., TJX Cos. Inc. and Walmart Inc. all making the cut.
The category that’s really missing is the vast middle of the price spectrum, specifically the retailers in the malls, which have struggled to drive traffic. Gap Inc., Dillard’s Inc., Macy’s Inc., Abercrombie & Fitch Co. and Ascena Retail Group Inc. are all garnering multiples of around 5-times or below.
That essentially shows disinterest on the part of investors, who remain very wary of the traditional retail crowd. (Even if these companies are taking massive strides toward new models, they’re having trouble getting credit for it from investors.)
Just what kind of companies win and lose the valuation game also says something about the herd mentality of investors — and the machines that do their trading.
Investors are not just animals of the income statement. They are often seduced by the storytelling of charismatic ceo’s, lulled by conventional thought and, on a given day, about half of all trading is actually done by machines.
“If there’s anything we’ve learned is that algorithms are only as good as the data they’re based on,” said consultant Jonathan Low, partner at Predictiv. “My concern is that this would be like [the crash of] 1987, where all the computer-driven analysts are jumping into the same stocks. Everybody doing the inputting uses the same hardware and software and they all went to the same schools and they all work for the same kind of firms and have the same kind of incentives. Is this just a digital reflection of herd mentality? Have all these algorithms been programmed to look at the same indices?”
The Double-digit Club
|An enterprise value of more than 10-times EBITDA has long been seen as a solid valuation in fashion — it’s a distinction now that is reserved for luxury and deep value.|
|Enterprise Value/EBITDA multiple|
|Stitch Fix Inc.||44.6|
|Canada Goose Holdings Inc.||32.6|
|Lululemon Athletica Inc.||25.5|
|Under Armour Inc.||25.4|
|Marks & Spencer Group||22.2|
|Burlington Stores Inc.||14.5|
|LVMH Moët Hennessy Louis Vuitton||14.5|
|Salvatore Ferragamo Italia||14.1|
|Ross Stores Inc.||13.9|
|Levi Strauss & Co.||13.8|
|TJX Cos. Inc.||12.8|
|Tiffany & Co.||12.8|
|Lands’ End Inc.||11.8|
|Source: S&P Capital IQ’s accounting of current enterprise value and EBITDA for the most-recent 12 months available.|