One of the most exciting events for an investor is an initial public offering. As a company gets set to become a public entity, the anticipation builds and the opening event usually ends up being spectacular, either in a good way as with Twitter or in a bad way as with Facebook.
However, when viewed in a long-term context, the most important factor to consider with an IPO is the company-in-question's growth potential. My most successful IPO investment was Michael Kors Holdings (NYSE:CPRI) and I found it by focusing purely on the company's long-term prospects.
As I scour the investing landscape for possible future lucrative IPO opportunities, one private company stands out to me in particular: Tory Burch.
Brand strength is everything
When it comes to high-end retail, brand strength is the first component of a company that I consider. Quite simply, if a retail company's brand or brands are not immensely popular and they do not possess extreme pricing power, I will not invest in the company.
The reason is simple: in the competitive world of fashion retail, there will always be upstart companies that look to challenge the industry leaders. The only protection that well-entrenched companies and their shareholders have is brand strength. A strong brand means loyal consumers and repeat business, as well as the ability to maintain market share and pricing power.
So, how do we identify strong brands in retail? One way that has served me well is through social media. Checking up on a brand's popularity and comparing it to its peers is simple and very effective.
Let's begin with a social media comparison between Michael Kors and one of its main competitors, Coach (NYSE:TPR). The official Michael Kors Facebook page has approximately 11.5 million fans, which is more than double the 5 million fan count of Coach's official page. So, we can already tell that Michael Kors is currently a much more popular brand than Coach.
A quick check up on both companies' recent earnings releases reveals the consequences of this; Michael Kors is competing directly against Coach in many product categories, like handbags and accessories, and it is in fact stealing market share from Coach. For instance, in North American markets during the first-quarter period, Michael Kors experienced a 31% increase in revenue while Coach saw a 1% decline.
The following is a breakdown of Michael Kors' projected growth in 2015 in comparison with that of Coach:
|Company||Revenue Growth 2015||EPS Growth 2015|
*Michael Kors' fiscal year ends in March
*Coach's fiscal year ends in June
The data above indicates that brand popularity does indeed translate into more robust growth. Michael Kors' projected growth in 2015 is even more impressive when we consider that fiscal 2014 expectations call for a staggering 47% sales growth and an even more impressive 58% EPS growth.
Is Tory Burch equally strong?
Now let's check up on Tory Burch. Some of the company's main competitors are Lilly Pulitzer, Donna Karan New York, and C Wonder, the latter of which is the company of Tory Burch's ex-husband Chris Burch.
The social media test reveals that Tory Burch is indeed the most popular brand out of all listed competitors, mostly by a wide margin. Tory Burch's official Facebook page has 950,000 fans, which is a good deal more than Lilly Pulitzer's 700,000, more than double Donna Karan New York's 400,000 and more than five times C Wonder's 180,000, approximately.
However, investors need to know more about Tory Burch aside from the brand's popularity. Although it is difficult to gain up-to-date numbers since the company is not public, we do know that Tory Burch generated revenue of $800 million in 2012. Interestingly, Michael Kors generated $800 million in revenue in 2011, which is the year before it went public.
This is not to say that if Tory Burch were to go public in 2014, a year after generating $800 million, it would be valued at Michael Kors' current valuation of $20 billion. However, it does illustrate the immense opportunity that an IPO of a popular retail brand can present to investors.
Tory Burch was last valued at $3.5 billion in 2013, which is still a very small valuation in comparison with those of Michael Kors and Coach. This is impressive, considering that the company probably generated over $1 billion of revenue in 2013.
A Michael Kors in the making?
While it is impossible to say whether an IPO of Tory Burch could be anywhere near as successful as the 2011 IPO of Michael Kors, the fact remains that there are enough interesting similarities between the two companies and brands to make it a worthy consideration. As such, a possible Tory Burch IPO is something that I would most likely partake in and one that all aggressive long-term growth investors should consider.