Ever since fashion designer Michael Kors (NYSE: KORS ) made it seem easy two years ago for retailers to effortlessly IPO their stock and have shares run away thereafter, retail fashion offerings are becoming more popular, including the latest entrant to the race, Vince Holdings (NYSE: VNCE ) , which priced its stock above the expected range a week or so ago and then watched it soar 46%. Yet despite a well-received launch, the formerly named Apparel Holding is no Michael Kors, and investors would do well to use caution before plunking money down.
Vince priced its IPO at $20 a share -- a dollar better than the upper end of the range that had been expected -- and watched it open at $29, valuing the retailer at $726 million and putting it in the same league as specialty retailer Francesca's, but well below rivals like ANN, Jones Group, and Fifth & Pacific.
However there are significant weaknesses in this retailer that lead me to believe we'll likely see the stock fall.
Vince has a fairly narrow product line, consisting primarily of pricey tops, leggings, and jackets, and though it more recently added shoes and gear for men, these are not exactly underserved markets, and the quick pace of fashion trends could easily see its styles fall out of favor. A few years ago New York & Co. made the apparently unforgivable sin of neglecting to have the color yellow represent a large enough proportion of its merchandise as sales growth faltered.
And because Vince derives a majority of its sales from just four department store chains -- Saks, Nordstrom, Neiman Marcus, and Bloomingdale's account for 61% to 63% of its revenues -- it represents a significant customer concentration risk should one of them cut back. Saks, for example, is in the process of being acquired by Canada's Hudson Bay, the owner of Lord & Taylor and its eponymously named chain, and the new parent may have different ideas about carrying a rival's goods in its stores.
That risk needs to be diluted through greater retail exposure, the opening of new company-owned stores (it owns 27 as of Oct. 5), or through further expansion of its website, which currently accounts for 15% of revenues.
Vince has done well so far before going public, with sales up 27% in the first half of the year and comps nearly 32% higher. So it's no slouch, particularly as margins remain pretty high, but there's no guarantee its growth plans will meet with success, either, and the public markets are tough taskmasters with a far shorter horizon for effecting change. The IPO of Francesca's two years ago is a case in point, with investors having had similar high hopes for the future and the stock acting like a rocket out of the gate, but time and tension have taken its toll and the stock has since tumbled as sales dried up.
Although Vince would be the first fashion house to go public in the U.S. since Kors -- undoubtedly a cause of at least some of the good buzz being generated about it -- both Prada and Salvatore Ferragamo launched IPOs in Europe, and they're feeling the effects of a churlish global economy.
We've seen any number of high-end retailers come up short, with Saks missing second-quarter estimates as losses widened; Nordstrom's third-quarter effort came up weak; and Coach continues to experience big problems in its North American division. Moreover, more fashion houses like J. Crew and Kenneth Cole have chosen to go private again to escape public scrutiny, while teen-beat trendsetters Hot Topic and rue21 went private as well rather than remain in the spotlight.
It's a highly competitive marketplace, driven by consumers who are at once fickle, price-conscious, and demanding. On the other side are rising costs and clothing trends that can change on a dime. Sure there's buzz developed around this luxury retailer's IPO, but with the risks implied by its business model and the dangers inherent in the industry let alone the overall economy, I don't see Vince Holding holding on to being invincible for very long.
It's not only Wall Street that's in a hurry
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