IPOS: ONLY SUPERSTARS NEED APPLY
Byline: Thomas J. Ryan
NEW YORK — Despite the smashing stock market debuts of both EstAe Lauder and Gucci, demand for initial public offerings of other fashion-related firms remains in a stupor.
“Either you’re a superstar or you’re not getting the attention,” said Elizabeth M. Eveillard, managing director at PaineWebber specializing in apparel and related issues.
Investment bankers and Wall Street analysts said the hunger for Lauder and Gucci mirrors the volatile market performance of publicly traded apparel-related stocks, where a few continue to soar while the majority remain stagnant or have sunk to severely depressed levels.
“There’s an enormous dichotomy between the good and the bad,” said Jay Meltzer, an analyst at Johnson Redbook Service. Among the established stars on Wall Street are Tommy Hilfiger Corp., The Warnaco Group, Authentic Fitness Corp., Fila Holdings and Kenneth Cole Productions, all of which have been able to tap the secondary market with offerings this year.
Peter J. Solomon, who heads an investment banking firm bearing his name, also noted while “there are some bright lights,” the market is negative toward investing in retail- and fashion-related issues.
“It’s as hot as it can be in certain areas, but the consumer apparel business is so bad right now that you have to make one hell of a case to go public,” Solomon said. While the overall IPO market was robust in 1995, only six fashion issues have gone public in 1995. That marks a continuing descent from 10 offerings in 1994, 15 in 1993 and 24 in 1992.
The market reaction to 1995’s crop was mixed. Investors gobbled up the offerings of Gucci, Lauder and Gadzooks, a teen apparel retailer, with all three firms able to increase the number of shares sold in their offerings from initial planning.
Lauder was priced at 26 a share in November, ahead of its projected price range of 22 to 24, while Gucci and Gadzooks — priced in October — reached the upper end of their expected price ranges. All three stocks are trading well above their offering prices.
Intimate Brands Inc. — a spinoff of several Limited operations, including Victoria’s Secret, Cacique and Bath and Body Works — hit the high end of its offering range of 15 to 17 a share, but is now trading below its offering price. Tarrant Apparel, a private label apparel firm, had to reduce the size of its offering to 2 million from the 2.5 million originally planned, and the offering price of 9 came in well below its projected price range of 13 to 15.
Finlay Enterprises, a jewelry chain, went public in April at 14, which was at the low end of its projected price range of 14 to 16 a share. However, the company is trading above its IPO price.
In the IPO backlog are Revlon, Loehmann’s, and Adidas AG. Analysts said many firms are waiting for better earnings or a healthier overall market for retail issues before attempting to go public.
“Given the difficult overall environment, only retail and apparel firms that have superior concepts and financial results will be well received by the IPO market,” said Eveillard.
“Why go public in a hostile environment?” said Robert S. Natale, who covers emerging and special situations at Standard & Poor’s Corp., noting that many retailers are postponing offerings until valuations of publicly traded retail issues improve.
“The best advice an investment banker can give their clients is to wait until next year,” Natale said. “Unless your concept is really strong, where you’ve demonstrated success for a long time, then you should wait. Everyone’s concerned about profit margins in a saturated environment.”
Eveillard said Lauder and Gucci were special situations.
“Gucci’s most recent numbers were superb, and the market clearly believed there was a true turnaround there, whereas Lauder had a very long record of excellent results. If they want to do as well, they have to have a similar profile,” Eveillard said.
Gilbert Harrison, chairman at Financo Inc. investment firm, concurred.
“There’s a limited supply of good companies that can go public with the story that’s needed to sell,” Harrison said.
Harrison said the higher valuations of stocks like Hilfiger, Nautica, Authentic Fitness and Kenneth Cole Productions show they are “market leaders, and the public recognizes them.” In some of the successful secondary offerings, shareholders were able to reap millions as well. For example, Kenneth D. Cole, president and chief executive officer of the firm carrying his name, pulled in $42 million in a May offering, and Linda J. Wachner, chairman and president at Warnaco, earned $18.5 million in a September offering. However, Harrison said the majority of stock prices reflect extreme pressures at retail, and he said he’s “written off” the Christmas season already.
“This Christmas is a disaster. There are so many retailers selling goods at distressed prices, and it’s having a ripple effect on all of the strong retailers as well,” Harrison said.
Peter Schaeffer, a retail analyst at Dillon Read, also noted that part of the lack of interest in retail issues is that the IPO market is so cluttered.
“In a market like this where there’s hundreds of issues to choose from and the retail industry in general is lousy, if you don’t have great numbers, the deal is not going to get done.”
On the positive side, Schaeffer said that “if you’re a good retailer, this is a great time to go public because if you’ve got good numbers in a bad environment, people are going to pay attention.”
The poor showing by most apparel-related firms also reflects the squeeze on the middle market.
Meltzer said that disposable income continues to slant away from apparel products toward hard goods like computers and a variety of other things such as transportation.
“They’re a lot of things screaming for the dollar, and apparel has been and continues to be a readily deferrable expenditure,” said Meltzer.
At the same time, upscale firms like Gucci, St. John Knits, HermAs and Escada have all done well this year because of the spending proclivities of higher-income consumers. Observers said the strong stock market and more job security among higher wage earners, as well as increased purchases by foreigners, have helped the upscale companies.
Solomon said the success of upscale firms reflects structural changes in the economy, changes that are harming the moderate-price retailers.
“The rich are getting richer, and the poor are having children,” said Solomon. He said that to blame overstoring and the movement toward casual dressing for retail’s deterioration is “a cop-out.” “Something much more fundamental is going on in the American economy to cause the decline in retail,” Solomon said. Analysts, though, generally agreed that 1996 would be a better year for apparel-related companies to attempt IPOs. Schaeffer said that while he’s still concerned about weakness in apparel and high consumer debt levels, retail should improve in 1996, particularly if interest rates are lowered.
Natale said retailer results will be going against easy comparisons, considering how poor 1995 has been, and the number of retail stores that have gone out of business may lessen competitive pressures on the survivors.
However, observers did not see a strong turnaround coming soon.
“I think it’s generally going to be soft retail sales probably for the rest of the Nineties,” Schaefer said, anticipating that the overstoring situation facing the industry “will take another three or four years to play out.”
“I don’t think retailers are ever going to have the kind of growth in apparel that they did four or five years ago,” said Natale. “The oversaturation of stores in the United States is a story that will be ongoing and will play out over a number of years.”
Solomon said,”It’s hard to tell when retail will turn around. I think we’ll only know after it’s done it. I don’t think anybody will call this turn.” — Fairchild News Service