Every dollar of earnings is the same, but the companies that bring them in are all different — and it shows in how much the underlying enterprise is worth.
Tech, luxury and activewear get top dollar in investment circles, while mall chains are on the discount rack as investors give hot brands and new ideas much more credit for the money that flows through their books.
Just ask Katrina Lake, chief executive officer of Stitch Fix, and Dani Reiss, ceo of Canada Goose Holdings Inc. Both of their companies scored valuations that topped even that of Amazon in a WWD study of 60 companies in the fashion space, based off data provided by S&P Capital IQ.
There are a million ways to look at any fashion company — from sales to earnings to number of stores to market capitalization to buzz — but it’s the enterprise multiple that really counts. That’s what buyers use to value companies in acquisitions, it’s how competitors are matched up against one another to determine relative strength and it’s behind many a buy-and-sell recommendation from Wall Street.
The enterprise multiple takes into account a company’s enterprise value (the total value of all its stock and debt, minus cash on hand) and earnings before interest, taxes, depreciation and amortization, or EBITDA, which is a proxy for cash flow.
It’s a sliding scale that looks not at a company’s size, but its economic punch and potential. The enterprise multiple is also closely tied to norms in a particular industry; tech and luxury players, for instance, enjoy much higher valuations than the brick-and-mortar crowd.
The AI-savvy online styling service Stitch Fix Inc. delivered EBITDA of $44.9 million over the past 12 months, earning it an enterprise value of $3.06 billion (all of which lies in the company’s stock), making for an eye-popping enterprise multiple of 68.3 times.
At the other end of the spectrum, Ann Taylor parent Ascena Retail Group Inc. drove EBITDA of $489.4 million, but has an enterprise value of $1.87 billion (most of which is debt), and an enterprise multiple of 3.8 times.
So Ascena produces more than 10-times the EBITDA of Stitch Fix, but every dollar earned by the specialty retailer translates into value of just $3.80 for investors. Every dollar that Stitch Fix brings in equates to $68.30.
That’s not necessarily the true ultimate value of either company or representative of the hard work of its employees — it’s how the market weighs the company and a reflection of what investors expect in the future.
And what investors are paying for is growth. Stitch Fix’s revenues tallied $1.17 billion over the past 12 months, up from $73 million in 2014. By comparison, Ascena’s revenues tallied $6.47 billion over the past four quarters, up from $4.79 billion in 2014 with the deal to buy Ann Inc., bringing in more than $2.5 billion in revenues in the interim.
The prevailing sentiment is that kind of growth will keep up. If it doesn’t, the company’s valuation will migrate lower. That’s already happened some, as Stitch Fix had an enterprise multiple of 100-times at the start of the year.
But it still has a very long way to fall before it finds itself mingling with the old-school retailers.
“The traditional brick-and-mortar retailers are trading at compressed multiples because people question the longevity of the business model,” said Shyam Gidumal, Northeast consumer products and retail market segment leader at consultancy EY. “The question is, what kind of growth are you going to get out of it?”
But having a name consumers recognize and connect with seems to be as important as ever, with branded companies from Nike Inc. (with an enterprise multiple of 23.4 times) to LVMH Moët Hennessy Louis Vuitton (16 times) still drawing solid valuations.
“The market is continuing to believe that having a brand is a meaningful value proposition that can generate meaningful growth,” Gidumal said. “They’re still trading at substantial multiples, even though some of them have multichannel distribution, some of which is challenged right now.”
Michael Boord, senior associate at Traub, agreed that “brand” still has plenty of kick in the market — but said other factors could also become more important.
“Drivers of the valuation discrepancies are brand, trend and technology — [the] first two represent the ‘art’ of the industry, which makes consumer/retail a sector that requires right brain,” Boord said. “Whoever nails the next trend can make a big jump in [enterprise multiple]. Maybe it’s the environmental angle, whoever is greenest in a few years could also command valuation premium.”
That market is watching closely for what’s next.
WWD LIST: Valuing Fashion Companies
|Analysts and would-be acquirers use enterprise multiple (which factors in enterprise value and earnings before interest, taxes, depreciation and amortization) to see which companies are getting the most traction — the quick answer is anything in tech, luxury or activewear.|
|1||Stitch Fix Inc.||Technology||68.2x|
|2||Canada Goose Holdings Inc.||Retail/Wholesale||63.3x|
|5||Under Armour Inc.||Activewear||28.8x|
|8||Lululemon Athletica Inc.||Activewear||24.7x|
|15||The Estée Lauder Cos. Inc.||Beauty||18.7x|
|17||Columbia Sportswear Co.||Activewear||17.2x|
|18||Burlington Stores Inc.||Off-price||16.5x|
|19||LVMH Moët Hennessy Louis Vuitton||Luxury||16.0x|
|20||Tiffany & Co.||Luxury||15.6x|
|24||Chow Tai Fook Jewellery Group||Accessories||14.4x|
|25||Burberry Group plc||Luxury||13.9x|
|26||Luxottica Group SpA||Accessories||13.9x|
|27||Ulta Beauty Inc.||Beauty||13.7x|
|29||Ross Stores Inc.||Off-price||13.2x|
|30||Fossil Group Inc.||Accessories||13.0x|
|32||Procter & Gamble Co.||Beauty||12.3x|
|33||TJX Cos. Inc.||Off-price||12.3x|
|35||Hugo Boss AG||Retail/Wholesale||11.8x|
|36||G-III Apparel Group Ltd.||Retail/Wholesale||11.8x|
|39||Urban Outfitters Inc.||Retail||10.7x|
|41||Ralph Lauren Corp.||Retail/Wholesale||10.4x|
|42||Michael Kors Holdings||Retail/Wholesale||9.9x|
|43||Perry Ellis International||Retail/Wholesale||9.6x|
|44||Walmart Inc.||Mass retail||9.2x|
|45||H&M Hennes & Mauritz||Retail||9.1x|
|46||Li & Fung Ltd.||Manufacturing||8.8x|
|47||American Eagle Outfitters Inc.||Retail||7.9x|
|48||Target Corp.||Mass Retail||7.9x|
|50||Tailored Brands Inc.||Retail||6.4x|
|52||L Brands Inc.||Retail||6.1x|
|56||J.C. Penney Co. Inc.||Retail||5.5x|
|57||Avon Products Inc.||Beauty||5.3x|
|58||Abercrombie & Fitch Co.||Retail||4.8x|
|59||Chico’s FAS Inc.||Retail||4.1x|
|60||Ascena Retail Group Inc.||Retail||3.8x|
|Source: S&P Capital IQ as of 7/18/2018|