- The US retail industry is facing structural headwinds that some observers have referred to as “the retail apocalypse.” The UK high street is also experiencing challenges.
- Despite the well-publicized struggles in the retail sector in the US and Europe, multiple retailers have held initial public offerings (IPOs) in 2017. The share price performance of the newly listed companies has varied widely.
- The companies that have seen share price appreciation since listing are generally well established, with proven business models, sustainable revenue growth and earnings, and fast supply chains.
- Numerous issuers that were taken to market under an aggressive growth strategy have seen marked share price underperformance. These are generally pure-play startup companies that have posted high revenue growth rates while registering profit losses, raising questions about the scalability and viability of their business models.
The US retail industry is facing structural headwinds that some observers have referred to as “the retail apocalypse.” In 2017, many prominent US retailers have struggled to compete with Amazon and e-commerce pure plays. Some companies have filed for bankruptcy and, as of the end of November, US retailers had announced more than 6,400 store closures this year. In the UK, retail is also experiencing challenges, including e-commerce disruption, rising input costs and Brexit-related uncertainty.
Despite the well-publicized struggles in the retail sector in the US and Europe, multiple retailers have held IPOs in 2017, including fashion, furniture and food companies. Their share price performance has been diverse. The newly listed companies whose share price has appreciated are generally well established, with proven business models and sustainable revenue growth and earnings.
A number of issuers that were taken to market under an aggressive growth strategy have seen marked share price underperformance. These are generally pure-play startup companies that have posted high revenue growth rates while registering profit losses, raising questions about the scalability and viability of their business models.
Despite the well-publicized struggles in the retail sector in the US and Europe, multiple retailers have held IPOs in 2017. The share price performance of the newly listed companies has been diverse. Companies that have seen share price appreciation are generally well established, with proven business models and sustainable revenue growth and earnings. By contrast, many of the companies that have seen marked share price underperformance since listing—despite the US stock market climbing to record highs—were taken to market under an aggressive growth strategy. These underperformers are generally pure-play startup companies that have posted high revenue growth rates while registering profit losses, raising questions as to viability of their business models.
In this report, we analyze selected fashion, furniture and flooring, and food companies that have held IPOs this year, focusing on their performance in terms of operating results and share price since their IPOs. We also shed light on the companies’ various growth strategies and catalysts.
Fashion companies that have held IPOs in 2017 include:
- Aspirational luxury companies Canada Goose and SMCP.
- UK fast-fashion online pure-play Quiz Clothing, UK activewear retailer Footasylum, US-based women’s apparel and footwear retailer J.Jill and Canada-based outdoor retailer Roots.
- Subscription box company Stitch Fix.
- Turkey-based jeans retailer Mavi.
- Hong Kong–based textile manufacturer Crystal International Group.
In furniture and flooring, we saw IPOs from UK-based online mattress retailer Eve Sleep and US-based flooring and tile company Floor & Decor.
Several North American and European food companies have also held IPOs this year, including:
- Meal-kit delivery companies Blue Apron (in the US) and HelloFresh (in Germany).
- Canadian healthy fast-food chain Freshii.
- UK-based fresh prepared food provider Bakkavor.
These four food companies are capitalizing on the theme of convenience and speed in meal preparation as well as on consumers’ continued preoccupation with healthy eating. According to Euromonitor International, consumers are increasingly seeking convenient food options, whether through smaller, more frequent shopping trips or online food purchases.
Finally, US plus-size clothing retailer Torrid has registered to go public in the near future. The company hopes to tap into the large but substantially underserved plus-size market in the US.
The table below lists notable apparel, furniture and flooring, and food company IPOs that have taken place this year as of late November, along with the companies’ individual share price performance since listing. In the sections that follow, we analyze each company listed in more detail.
Fashion and Apparel Retailers
Canada Goose is a vertically integrated high-end outerwear brand that completed its IPO in March 2017. The company operates through the wholesale channel, e-commerce and its own retail stores in North America, and it recently opened its first European store, on London’s Regent Street.
- Since listing, Canada Goose has posted strong revenue growth, driven by online sales. The brand has unveiled ambitious expansion plans, given its relative underpenetration. Canada Goose is often compared to Moncler, an Italy-based premium outerwear company, as both firms are capitalizing on consumer demand for upscale, luxury outerwear.
- Canada Goose’s total revenues increased by 39.6% year over year in the first half of 2017 and its gross profit margin expanded by 540 basis points, to 50.0%, over the same period. Management revised its fiscal 2017 outlook upward and now expects revenue growth of least 25% for the full year versus the prior forecast of growth in the mid-to-high teens. Management now expects full-year adjusted EBITDA margin expansion of at least 50 basis points versus flat-to-modest expansion previously and full-year EPS growth of at least 35% versus approximately 20% previously.
- The company expects continued sales growth, driven by the e-commerce segment, new store openings, penetration of new international markets and product innovation, including expansion into knitwear, footwear and raincoats. Canada Goose is decreasing its reliance on struggling wholesale accounts in the US and is planning new e-commerce site launches in fiscal 2018. We think that the brand resonates well with consumers and has room for further growth, especially in China and other regions outside North America where it less well known.
US women’s fashion retailer J.Jill completed an IPO in March 2017. J.Jill operates 270 stores in the US as well as a transactional website.
- J.Jill has posted very poor results since its initial listing. In October 2017, the company lowered its guidance for the third quarter, forecasting a comparable store sales decline of 3%–5% year over year, a moderate decline in gross margin compared with last year and lower EPS than it had previously expected.
- The company has been experiencing soft sales trends across both the retail and direct channels, reflecting product and marketing issues that have impacted traffic and conversion. As of mid-November, the company’s shares had fallen a whopping 62% since the March IPO.
Canadian outerwear and casualwear retailer Roots completed its IPO in October 2017. Established in 1973, Roots is an iconic lifestyle brand that distributes through its own retail stores in Canada and the US, partner-operated stores in Taiwan and China, and a global e-commerce platform that ships to 54 countries.
- The Roots offering was a listing flop from the beginning, as shares were issued at C$12, below the initial targeted offering range of C$14–C$16, and closed the first trading day at just C$10; both price drops indicated a lack of investor interest. The shares continue to lag and, as of mid-November, were down more than 20% since the listing. Despite strong sales growth, Roots posted negative operating income and EPS losses in the first half of 2017, and the company has seen declining gross margins and EBIT margins in its last three fiscal years.
- Management forecast that total company sales will increase at a CAGR of 13%–17% between 2016 and 2019 and that comparable sales over the same period will be in line with or above the 8.3% level achieved in fiscal 2016. The company plans to open 8–10 new stores in Canada, 10–14 new stores in the US, and 20–25 new stores in Taiwan and China, as well as establish a presence in Singapore and Malaysia, by the end of fiscal 2019. In the past three fiscal years, the company’s e-commerce sales have grown at a CAGR of 44%, and online sales represented 13.3% of total sales as of July 29, 2017.
Footasylum is a UK athletic footwear and clothing retailer that targets consumers ages 16–24. The company listed on London’s AIM junior market in November 2017.
- Footasylum was established by the cofounders of JD Sports, another UK athletic/lifestyle retail success story and a recent stock market darling.
- The company plans to double its number of stores and use part of the proceeds from its listing to fund its expansion.
- Footasylum is capitalizing on the athleisure and streetwear trend by offering fashionable lifestyle merchandise for fashion-conscious consumers.
- The company enjoys significant opportunities for continued growth. It operates more than 60 stores and an e-commerce platform, and it recently launched a wholesale arm to distribute its own private labels to partners such as ASOS. While still in its infancy, the company’s wholesale platform is expected to continue to provide incremental sales.
- Footasylum sells approximately 300 brands, including globally established brands such as Nike and Adidas, and smaller, up-and-coming brands such as Gym King, along with its five own in-house labels.
- The company has exhibited strong financial performance in recent years. Total revenues increased at a CAGR of 37% between 2015 and 2017 and EBITDA grew at a CAGR of 125% over the same period.
- In fiscal 2017, e-commerce sales accounted for 29% of Footasylum’s total sales, and online revenues grew at a CAGR of 55% between 2015 and 2017.
SMCP is the owner of French aspirational contemporary fashion brands Sandro, Maje and Claudie Pierlot. It completed an IPO in October 2017, marking the second-largest listing on the Euronext Paris stock exchange this year, behind car-leasing company ALD Automotive. SMCP is a fast-growing company that operates 1,200 retail stores in 36 countries. It targets customers ages 15–45 and distributes products through the wholesale and online channels in addition to its directly operated stores.
- SMCP’s sales increased at a CAGR of 24% between 2014 and 2016. In constant currency, the company’s comparable store sales increased by 7.1% year over year in fiscal 2016 and its EBITDA margin expanded by 70 basis points, to 16.5%.
- SMCP has many growth opportunities and plans to use the proceeds from its listing for international expansion. Since 2014, the company has opened approximately 122 new points of sale annually. The group plans to open 32 new points of sale in the fourth quarter of 2017.
- E-commerce is a growing distribution channel for SMCP and e-commerce sales represented 12.3% of the company’s total sales in the first half of 2017, up from 2.8% in 2013. The company sells merchandise through its own online stores and through third-party sites such as Net-a-Porter.com, Zalando.com and Tmall.com.
- SMCP offers on-trend and high-quality merchandise at prices that are more attractive than those of luxury brands. The company’s business model blends luxury with fast fashion and relies on a short, reactive, design-to-production cycle of 100–120 days. Fast-fashion brands’ cycles are even faster, at 35–40 days, but SMCP’s cycle is much faster than the average 365 days in the luxury goods sector. The company ensures quick delivery times by using suppliers that are located close to its core markets; approximately 51% of total production is concentrated in Europe and North Africa. Timely feedback from retail stores and optimized inventory management help SMCP identify top sellers, which are rapidly replenished and which represent approximately 10%–15% of all orders.
Quiz Clothing is a UK omnichannel fast-fashion womenswear retailer specializing in special occasion apparel and dressy casualwear. The company listed in July 2017.
- Quiz Clothing sells in more than 300 stand-alone stores, concessions and franchised stores, as well as through wholesale and online partners in 20 countries. The company’s online partners include Next/Lipsy and Zalando.
- The retailer has been growing rapidly, reflecting its strong value proposition, differentiated and compelling merchandise, and constant product newness. It plans to continue to expand in the UK and international markets.
- Quiz Clothing releases new inventory nearly weekly and attracts young customers through original editorial content posted on its website and social media channels.
- The company reported that revenues increased by 35% year over year, to £56 million, in the first half of fiscal 2017 (ended September 30). Online sales increased by 204% year over year in the first half and represented 25% of total sales.
- Quiz Clothing operates a very fast and flexible supply chain that can easily adapt to consumer preferences. Through its “test and repeat” business model, the company is able to introduce new products to its stores and website just two to four weeks from the time of order, and reorder successful lines more quickly. The group believes it has one of the fastest supply chains in the UK fashion industry, and that this is a key strength of its business.
- Opportunities for growth include launching new product categories. Quiz Clothing has already successfully introduced bridalwear and a plus-size line called Curve.
Turkey-based Mavi held an IPO in June that was the largest IPO in Turkey since 2013. The jeans and lifestyle apparel brand targets fashion-conscious consumers under age 35.
- • In fiscal 2016, Mavi sold 7.5 million denim items globally through its own 392 monobrand stores and 5,500 points of sale in 35 countries. The company’s exposure is highest in Turkey, followed by the US, Canada and Germany. Outside Turkey, Mavi operates 61 monobrand stores and distributes through wholesale partners such as Bloomingdale’s, Nordstrom, Amazon and Zalando. The company continues to open owned retail stores.
- • Mavi has posted double-digit comparable store sales growth and EBITDA margin expansion in each of the last three years. In the first half of 2017, the company reported year-over-year comparable store sales growth of 21.5% and e-commerce revenue growth of 57%. Company management expects fiscal 2017 comparable store sales to increase by more than 16%. We think e-commerce represents a huge opportunity for the company, as less than 2% of its sales are currently made online.
- • The company’s supply chain allows for short times to market, and it is achieving lead times of six to eight weeks from time of order.
Crystal International Group
Crystal International Group’s shares started trading in November on the Hong Kong Stock Exchange. The group manufactures apparel for many globally recognized brands, including Fast Retailing (owner of Uniqlo), H&M, Marks & Spencer, L Brands (owner of Victoria’s Secret), Abercrombie & Fitch and Gap. Key listing investors included Fast Retailing and L Brands.
- Founded in 1970, Crystal International Group was the world’s largest apparel manufacturer by production volume and the second largest by production value in 2016, according to Euromonitor International. Sales from its five largest customers accounted for nearly 61% of revenue in the first half of 2017, with 33% of revenue derived from its largest customer. Such high revenue concentration among key clients brings risks, however.
- The company operates 20 manufacturing facilities across five countries and offers clients various services along the supply chain, including product design.
- Crystal International Group’s growth strategies include focusing on its co-creation and value-added services for clients and expanding into the sportswear and outdoor apparel categories.
- The group’s total revenue increased by 23.8% year over year in the first half of 2017, when gross margin expanded by 170 basis points year over year, to 19.9%.
- The global apparel industry is intensely competitive, with a significant number of players.
- The company will use about 65% of the funds raised from its listing to boost manufacturing capacity in Vietnam and Bangladesh and to increase fabric production over the next two to three years.
Flooring and Furniture Retailers
UK online mattress retailer Eve Sleep listed in May 2017 on London’s AIM junior stock exchange. The company sells six types of premium mattresses across 10 countries. In the UK, it has distribution partnerships with online retailers that include Amazon, Tesco and Wayfair and offline partnerships with Debenhams, Fenwick and Next Home. Eve Sleep also recently signed an exclusive distribution agreement with the Karstadt department store chain in Germany.
- Eve Sleep’s revenues increased by 126% year over year in the first half of fiscal 2017 (latest), reaching £11.5 million, and its gross margin expanded by 400 basis points, to 60.4%. However, the company is unprofitable, as it is currently investing heavily in marketing to build its brand presence. The company’s EBITDA loss more than doubled during the most recent reporting period. Management estimates that it will make a profit in 2019, once marketing expenses decline and the brand is more established.
- Apart from increasing its number of physical distribution points through partnerships with major retail chains, the company seeks to grow by increasing sales of ancillary, nonmattress products such as pillows, sheets and duvets. Nonmattress sales accounted for 10% of Eve Sleep’s total revenues in the first half of 2017, up from 4% one year earlier.
- In the first half of 2017, Eve Sleep’s product return rates declined to 13% from 18% a year earlier.
- Although the furniture and mattresses category is the second-fastest growing online product category, according to the company, the space is highly competitive, with multiple online pure-play startups such as Casper vying for market share.
Floor & Decor
US flooring specialist Floor & Decor went public in April 2017 and has since posted strong operating metrics and share price performance. Founded in 2000, the company operates 80 warehouse-format stores, which average approximately 72,000 square feet. Floor & Decor offers hard surface flooring such as tile, wood, laminate and natural stone flooring along with decorative and installation accessories.
- Floor & Decor has posted eight consecutive years of double-digit comparable store sales growth. Following stellar results for the first nine months of 2017 (latest), the company raised its fiscal 2017 sales and earnings guidance. Management now expects full-year comparable store sales to grow by 14.5%–15.5% year over year and EPS to increase by 42%–44%.
- The company has a unique business model that combines innovative product offerings, in-stock inventory and a compelling value proposition.
- Floor & Decor currently operates 80 warehouse stores and continues to open new ones. Management believes there is potential for the company to operate up to 400 stores in the US market, presenting a long growth runway. Management plans to grow the store base by about 20% annually over the next several years.
The four food companies discussed below are capitalizing on consumers’ desire for convenience and speed in meal preparation and their increasing preoccupation with healthy eating. According to Euromonitor, consumers are increasingly seeking convenient options through smaller, more frequent shopping trips and purchasing food online.
- According to US Census Bureau data, US consumers spent more at eating and drinking establishments and on food delivery than they did on groceries for the first time ever in 2016.
- Delivery is the fastest-growing food-service channel in the US, according to Euromonitor.
- About 45% of UK consumers regularly visit convenience stores for top-up shopping, according to Mintel.
In the food space, we have witnessed a proliferation of meal-kit delivery companies, which deliver ingredients and accompanying recipes to subscribers’ doorsteps. US-based Blue Apron was the first US meal-kit company to go public. It was followed by Germany’s HelloFresh. Sun Basket, a smaller company that sells organic meal kits, hired bank advisors to prepare for a future IPO, but may delay its plans given the struggles that Blue Apron has faced following its own listing. Other meal-kit startups include:
- Good Eggs, which specializes in meal kits made from locally produced food.
- Green Chef, which provides organic ingredients and offers gluten-free, vegetarian and paleo diet recipes.
- Chefs Plate, a startup based in Canada, which is planning an IPO in the next year or two.
We estimate that US consumers will spend around $2.7 billion on online meal-kit services in 2017. In the US, Blue Apron is the market leader, and we think that HelloFresh is the second-largest player as measured by US revenues.
We have concerns that the meal delivery space is becoming overcrowded. Prepared food remains one of the least-scalable businesses, and despite heightened competition in the meal-kit category, we think there is room for only one or two players to operate at scale.
- US grocer Albertsons purchased meal-kit company Plated in September 2017.
- Amazon launched its own prepared meal kits in the US in July 2017. The retailer has an advantage in that it already has millions of Prime members to whom it can market its meal kits.
We see meal-kit firms facing a number of headwinds:
- Companies such as Blue Apron spend heavily on marketing to compete for customers and, as a result, register steep profit losses.
- Meal kits are a new market and providers may see consumer uptake plateau or even decline. Further expansion depends on mass-market adoption.
- In some respects, meal kits contradict the demand for last-minute convenience and flexibility, as consumers are tied to the recipes they receive in advance.
We predict that the majority of meal-kit startups will have to either merge or partner with brick-and-mortar grocery chains in order to survive.
Blue Apron is a US-based provider of healthy, non-GMO and organic meal kits. The company listed in June 2017.
- Blue Apron priced below its targeted valuation a few days after Amazon unveiled a deal to acquire Whole Foods Market.
- Blue Apron has also faced challenges since its IPO. The company was forced to cut prices on its products in June 2017 and it shed 6% of its global workforce in October following weak earnings results.
- The company’s sales increased by just 3% year over year in the third quarter of 2017 (latest). The growth rate was much lower than its historical growth rates and reflected a 31% decline in marketing expenditure. While average revenue per customer increased during the period, it was partially offset by a 6% decrease in customer transactions. Blue Apron’s cost of goods sold increased by 13% year over year in the third quarter, partially reflecting higher food costs due to the company’s expansion of its product offering and increased use of premium ingredients.
- The company’s adjusted EBITDA loss widened in the third quarter and cash flow was negative.
- Blue Apron’s marketing expense margin was 16.3% in the third quarter, down from 24.2% one year earlier. The company expects to lower marketing expenditure even further in the fourth quarter, in both absolute and relative terms, raising questions as to whether it will be able to retain existing customers and attract new ones.
German meal-kit delivery service HelloFresh completed an IPO in Frankfurt in early November 2017. HelloFresh had planned to go public in 2015, but shelved its IPO at the time due to unfavorable market conditions and Walmart’s announcement of poor earnings results on the day of the offer pricing. Founded in 2011, HelloFresh operates in 10 countries, including the US, and provides home delivery of fresh produce and ingredients to make home-cooked meals. The company is backed by Rocket Internet, a prominent German startup technology company.
- HelloFresh reported that it delivered 33.7 million meals to approximately 1.3 million customers in the second quarter of fiscal 2017 (latest). The company reported revenue growth of 49% year over year in the first half. However, HelloFresh recorded a higher year-over-year loss, of €56.7 million, in the first half, reflecting rising marketing and fulfillment costs. Management stated at the time that its goal was to reach profitability within the next 15 months.
Bakkavor is the leading supplier of fresh, private-label prepared foods and meals to UK supermarket chains, holding a 30% share of the UK fresh prepared food market by revenue in 2016, according to the company. Bakkavor also has a presence in the US and China. Internationally, the company is a supplier to food-service and retail brands such as Costa, Pret A Manger, Pizza Express, Harris Teeter and Starbucks, as well as US and Chinese retailers. Bakkavor completed its IPO in November 2017.
- In the first half of fiscal 2017, Bakkavor reported revenue growth of 5.7% year over year and operating margin expansion of 60 basis points, to 6.0%.
- Company growth strategies are focused on product introductions and expansion in the US and China.
- The company forecasts that meals category sales in the US will grow at a CAGR of 9% between 2016 and 2019.
- Bakkavor should continue to benefit from UK consumers’ growing demand for last-minute purchases of convenient food products versus comprehensive weekly grocery shops and cooking from scratch.
One of the fastest-growing health and wellness brands in the world, Freshii completed an IPO in January 2017. The Canadian healthy, quick-service restaurant chain operates 244 outlets in 15 countries. Its customizable offering consists of breakfast items, soups, salads, wraps, bowls, burritos, frozen yogurt, juices and smoothies.
- Freshii plans to capitalize on the momentum of societal healthy food trends and double its restaurant count over the next few years.
- Freshii’s comparable store sales increased by 5.1% in the third quarter of fiscal 2017 (latest) and the company consequently raised its comp guidance for the full 2017 fiscal year to approximately 5% growth, up from 3%–4% previously. The company has an ambitious store-opening program and expects to open 90–95 new stores in 2017 and to have 730–760 franchise stores by the end of fiscal 2019. Most new openings are planned for the US market, although the company is opening stores across various countries.
- Nevertheless, Freshii has reduced its planned number of store openings. Its previous objective called for annual net new openings of 150–160 stores. The company’s announcement that it was lowering it store-opening goal in September 2017 has had a dampening effect on its stock performance.
- Freshii previously operated 18 outlets in Target stores, but it closed those outlets in the third quarter of 2017 and ended its relationship with Target due to insufficient sales after more than two years.
- Management believes that millennials in particular are embracing the Freshii brand. The demographic is perceived to be more focused maintaining a healthy lifestyle than older age groups are.
On the Horizon
US-based plus-size women’s fashion retailer Torrid filed for an IPO in July 2017.
- Torrid was spun out of teen retailer Hot Topic and targets women ages 25–40 who wear sizes 10–30. The company operated 487 stores across 48 US states, Puerto Rico and Canada as of April 29, 2017.
- The plus-size market is a growing but underserved market in the US. Approximately two-thirds of US women wear plus-size clothing (sizes 14 and up) and the average US woman wears a size 16–18, according to The NPD Group. However, only 17% of US women’s apparel sales in 2016 were in plus sizes. Furthermore, most US plus-size retailers serve customers over age 40, even though approximately 50% of those who wear plus sizes are under age 45, according to Torrid.
- Torrid grew sales by 30.0% year over year in the first quarter of fiscal 2017 (ended April 29, 2017), driven by comparable sales growth of 12% and a 29% increase in space. The company’s gross profit contracted by 460 basis points, to 39.4%, in the first quarter, while its operating profit margin contracted from 14.3% to 3.4%, due to lower gross margin, higher selling and administrative costs, and share-based compensation.
- One of the company’s growth strategies is to increase online sales penetration from 34% in fiscal 2016 to 50% in the future.
- Despite the well-publicized struggles in the retail sector in the US and Europe, multiple retailers held IPOs in 2017. The share price performance of the newly listed companies has been diverse.
- Companies that have seen share price appreciation are generally well established, with proven business models, sustainable growth in revenue and earnings, and fast supply chains.
- The four food companies that went public in 2017 are capitalizing on consumers’ desire for convenience and speed in meal preparation and their increasing preoccupation with healthy eating.
- We predict that the majority of meal-kit startups will have to either merge or partner with brick-and-mortar grocery chains in order to survive.