IPOS: INTERNET IN, FASHION OUT
Byline: Thomas J. Ryan / Melanie Kletter
NEW YORK — Only dot-coms need apply.
That’s been the general mantra from the initial public-offering market, and it’s a call expected to continue into 2000. Although many see a pickup in 2000 from the currently depressed valuations of many retail and apparel issues, it probably won’t be enough to open the floodgates for fashion IPOs. While stock-market watchers said solid companies serving a niche can still do very well by going public, they face a tough task competing for investors, considering all the rage for Internet IPOs.
“Technology is the only game in town right now,” said John Fitzgibbons, IPO analyst at Redherring.com, a division of Red Herring Communications, specializing in information and analysis about the Internet.
Of the 12 fashion IPOs so far this year, eight were focused on the Internet. These e-commerce issues hiked up the number of fashion IPOs from only three in 1998, but the number of offerings is still down from the 14 that tapped the market in 1997 and far below the 23 that flooded the market in 1996, including such megabrands as Guess, Abercrombie & Fitch, Donna Karan International, Saks Fifth Avenue and Revlon.
The scarcity of fashion issues can largely be traced to the depressed valuations of publicly held apparel and retail stocks. That’s because the pricing of IPOs is largely based on the value of comparable public companies. Investors seem only focused on blue-chip stocks or technology stocks.
“Apparel firms are being overshadowed by dot-coms,” said Harriet Greenberg, partner at Friedman, Alpren & Green, an accounting firm. “The upside potential is so much more exciting for investors in that sector. That’s the focus right now, and what it looks like it is going to be for a while.”
For now, a steady stream of Internet and technology IPOs should continue unabated. Among technology issues priced just last week, VA Linux Systems Inc., which sells computers, stormed ahead 733 percent in its first day of trading; Andover.Net, a software firm, leapt 252 percent; and Agency.com, a Web site developer, soared 192.3 percent.
Although certainly not as smashing, the debut last week of Fogdog Sports, an online sporting goods store, and The Knot Inc., an online wedding site, saw good pricing in their IPOs.
Fogdog sold six million shares at $11 each, above its projected range of between $8 and $10 a share. The stock climbed as high as $22 in its first day of trading on Thursday before settling down to 14 5/8 by Friday’s close. The Knot sold 3.5 million shares at $10 each, the high end of its projected range, and closed at 11 Friday.
But the overall performance of e-commerce IPOs this year has been spotty. Ashford.com, which sells luxury accessories, was priced at $13 in September, and has already run up to 17 9/16 by Friday’s close. Alloy Online, FreeShop.com and Perfumania.com, are also both trading above their offering prices, but Fashionmall and iTurf are trailing.
Fitzgibbons said that although demand for Internet issues is still red hot, the market has become more selective, with technological advances and more business-to-business stocks tending to attract the hyper gains. But he still sees good demand for e-commerce issues as well as retailers and apparel suppliers possibly spinning off their e-commerce businesses, as in the case of iTurf from Delia’s and Perfumania.com from Perfumania.
Netjewels.com, a jewelry e-commerce site, is the only other fashion-related firm waiting in the wings to go public, but the market typically slows down near the close of the year.
Gilbert Harrison, chairman at Financo Inc., an investment firm, called the values on Internet companies “staggering.”
“It’s presented tremendous sources of financing for these basically start-up companies, which generally are not available,” he said. “More important, they’re able to go public with little or no sales at valuations that so far surpass that of the typical retail company. It borders on insanity, but this is what the investor seems to want and it still seems to be going on.”
What’s more, a steady stream of significant seed money remains available to create more of these Internet startups, leading to a fresh pack of potential IPOs down the road.
“We see new e-commerce opportunities every day, and in fact, some of the new companies are more interesting than those that are already out there,” Harrison observed.
With all this excitement over technology issues, fashion stocks seem to be getting ignored, particularly apparel makers.
Redherring’s Fitzgibbons said there needs to be a huge shift in sentiment for the major apparel vendors in order to lift valuations up for the whole group.
“You have to look at the leaders,” said Fitzgibbons. “They have to do better to spawn the me-toos and the wannabes. The class of the industry has to be sailing in order for the me-toos to crest.”
Jones Apparel Group is trading at 15 times its fiscal 2000 earnings; Tommy Hilfiger Corp. and Liz Claiborne are at 14 times, and VF Corp. and Warnaco Group are at 10 times. By comparison, the average of firms on Standard & Poor’s 500 index are trading at about 25 times earnings.
Christine Kilton-Augustine, analyst at ING Baring Selz, believes many of the key apparel branded players are being hurt by fall weakness in the department store channel. She also said that because of seasonality, the apparel sector typically underperforms in the second half and bounces back once Christmas sales roll in.
But Kilton-Augustine also said it’s harder than in the past for apparel firms to reach a size to be self-sufficient as public companies because of difficult demands by retailers. She said it often makes more sense for a smaller supplier to find funding by merging with a bigger company to take advantage of their capabilities rather than go public.
“It is less risky and a smoother transition for them to sell themselves than deal with the vagaries of the public market,” contends Kilton-Augustine. “Frankly, the fact of the matter is that we haven’t had a lot of success stories in the last few years.”
Indeed, the disappointments of a few high-profile IPOs such as Donna Karan, Polo Ralph Lauren and Revlon seem to linger in the minds of many investors, making them wary of the fashion risks inherent in the sector. But there have been many other poor IPO performances over the last four years, with shares trading under $5, and three — Loehmann’s, Garden Botanika and Pluma — landing in bankruptcy court. Of the 26 fashion stocks that have gone public since the start of 1997, 15 are trading below their IPO price.
Those postponing IPOs in the latest year included Pietrafesa, the men’s wear and sportswear maker that produces Alexander Julian; Hat World, a retailer of baseball caps, and HCI Direct, a mail-order hosiery firm.
On the retail side, some e-commerce firms are getting good valuations, but shares of many traditional apparel retailers are down — and that’s hurting demand for IPOs.
“Excluding the Internet, the success stories of retail IPOs have been few and far between,” said Elizabeth Eveillard, managing director and investment banker at PaineWebber.
Only two brick-and-mortar retail stocks — David’s Bridal and Charlotte Russe — tapped the market this year.
“Retail stocks are out of favor, other than a select few such as Wal-Mart and Tiffany, but those are just a handful of companies,” said Elisabeth Armstrong, vice president and analyst at Invesco, a money-management firm. “Nobody comes to market when the group is not doing well.”
One big worry for investors is that e-commerce shopping will seriously cut into brick-and-mortar shopping, according to Armstrong. Other concerns are that the consumer will not be able to keep up the pace of buying seen during this year, and that retailers will be able to keep increasing their operating margins, she said. Armstrong still maintains that “if you have a good niche concept, you can go public in any market.”
Eveillard suspects that some retailers that were hoping to go public this year postponed offerings until 2000 in hopes of a more receptive market, and that another year of good results would give them more confidence about having a successful IPO.
Many believe apparel and retail stocks will bounce back in 2000.
“The prices of stocks in the wholesale and retail area, not only in soft goods, are so low that you have to believe they’re going to recover,” said Peter J. Solomon, head of the investment banking firm Peter J. Solomon & Co. “People are acting as if there’s a recession around the corner every month, and they keep moaning about the warm weather. But you’ve got to believe that not just technology stocks will go up.”
Solomon said shares might bounce back as investors realize that traditional retailers and suppliers will be handling much of the E-commerce action in the future. In that scenario, Internet issues will come down to more logical values while traditional retail and wholesale issues will rise to more sound values. But he added that a rebound in stock valuations might not be enough to stir demand for IPOs.
As far as potential candidates for IPOs, many of the apparel’s largest firms seem content to remain private, including Levi Strauss & Co., Milliken & Co., Montgomery Ward, Belk Stores, Mary Kay, L.L. Bean, Boscov’s and Jockey.
More likely candidates would be rapidly growing firms that could use funds to reach that next level, such as BCBG by Max Azria, Tahari, Fubu, Mecca, Carhartt and Diesel. European luxury issues like Gucci and LVMH Moet Hennessy Louis Vuitton are also commanding far greater valuations than their American counterparts, possibly encouraging other companies to launch IPOs in Europe. Some see better demand for IPOs over there, possibly for Giorgio Armani. Also, firms owned by bankruptcy creditors, like Barneys New York and Maidenform, and ones by private equity firms, like J. Crew and Ellen Tracy, could also use the IPO route to cash out.
But Lissa Baum, senior vice president at Israel Discount Bank, said one problem with going public is that there is a constant demand for growth, but it’s hard to grow when business is generally flat in the apparel market.
“Wall Street is looking for growth, growth and more growth,” said Baum. “It is not always a straight line with a lot of these companies, and that is how they get into trouble. They end up overspending and having a misstep here and there. Companies don’t have to go public. There are other ways of cashing out.”
Options include a sale to a competitor or to a private investment firm, although private-equity players tend to want to take a large stake in the business and load on the debt.
But private-equity money has dried up somewhat recently.
“Private markets have moved in sympathy with the public markets to sexier industries,” said Daniel O’Connell, chief executive officer at Vestar Capital Partners, a venture-capital firm. “The amount of capital available for apparel companies has diminished as more [money] has moved to the Internet sector.”
Nonetheless, O’Connell said private-equity funds might prove to be a better alternative than the public market to fund the next stage of growth.
“For established brands that have a real franchise, a real following and good management, there is still private money out there,” O’Connell said. “While the public market is still volatile and runs hot and cold, the private markets tend to be more stable. I think there is still a lot of interest on behalf of private equity firms.”
Another option for sagging public companies is to go private. Vestar took St. John Knits private last year, and Concord Fabrics also went private, but it’s sometimes tough to find the money to buy out existing public shareholders at a nice premium.
Financo’s Harrison noted that the recent success of Bebe and Charlotte Russe proves that the market will accept compelling growth stories. Bebe, a contemporary chain, was priced at 11 in June 1998, and closed Friday at 30 3/16. Charlotte Russe, a juniors retailer, was priced in October at 11, below its projected range of 13 to 15, but was up to 13 7/8 by Friday’s close.
He said, however, that the market for IPOs from traditional retailers and apparel firms will likely continue to be “extremely selective” as investors hone in on technology issues. “The multiples on both apparel and retailers are down significantly and are not justified,” said Harrison, “but you can’t second-guess the marketplace.”