Apparel, Footwear & Accessories Market Update – September 2023

Luxury & Premium Brands Continue to Garner Buyer Appetite, Despite Consumer Headwinds in the Apparel, Footwear & Accessories Market

Persistent levels of inflation, moderating income growth, and a higher interest rate environment have continued to challenge the resilience of the U.S. consumer. While faults in consumer strength have started to appear, demand in the Apparel, Footwear & Accessories sector has remained robust through year-to-date (YTD) 2023. Clothing and footwear personal consumption expenditures increased 3.1% year-over-year (YOY) in July, marking the largest YOY growth since February, according to the U.S. Bureau of Economic Analysis.¹ Supply chain normalization has also benefited sector participants by providing increased transparency into inventory forecasting. Excess product had been a key challenge for the space, which often resulted in markdowns that impacted gross margins. However, retail inventories for clothing and clothing accessories stores grew a modest 1.3% YOY in July—a significant improvement from the start of the year when inventories rose 12.6% YOY, according to the U.S. Census Bureau.²

In recent months, consumers have demonstrated increased price sensitivity, resulting in a trade down effect in select products. However, the Luxury Goods segment of the Apparel, Footwear & Accessories sector has continued to harness healthy customer retention and near-term optimism. Notably, sales in the Personal Luxury Goods market are expected to grow up to 12% YOY in 2023, according to Bain & Company and Altagamma.³ The Luxury Goods consumer base is inherently less sensitive to inflationary pressures and recessionary headwinds—lending to the high degree of revenue visibility for many top luxury and premium brands. Moving towards year end and into 2024, luxury goods brands and broader sector participants will continue to be challenged by mounting headwinds to consumer strength. Brands with high levels of customer stickiness, defensible gross margins, and healthy unit sales growth are poised to capture buyer and investor interest.

Strategic acquirers continue to be on the hunt for growth, leading to a wave of consolidation in the sector despite the prevailing macro headwinds. With consumer spending remaining healthy and private equity investment levels poised to bounce back, we believe the stage is set for robust M&A activity in 2024.

Jesse BetznerSenior Director, Capstone Partners

Public Luxury Brands’ Trading Performance Challenged in Second Half of the Year

Public equity market performance in the Luxury Goods segment has recently encountered headwinds, following months of outperformance compared to broader equity markets. Through the first two quarters of 2023, return in Capstone’s Luxury Goods index amounted to 26.8%, compared to 16.4% in the S&P 500. However, in the period following the end of Q2, total return has declined to -13.4% while the S&P 500 has recorded slight gains at 0.3%. The decline in performance has come as revenues for top luxury brands have remained high, but questions on the strength of the U.S. consumer have become more prevalent. Notably, LVMH Moët Hennessy Louis Vuitton (ENXTPA:MC) recorded a 15% YOY revenue increase in the first half of 2023, according to its earnings release.⁴ However, LVMH noted a softening in demand from American consumers with organic revenue in the U.S. declining 1% in Q2. Kering (ENXTPA:KER) echoed similar sentiment with revenue in North America declining 23% YOY in Q2, according to its earnings presentation.⁵

The U.S. consumer has proved resilient through much of the year, but may be becoming stretched as prices have remained elevated and wage growth has moderated. Despite a pullback in stock price appreciation, valuation multiples for luxury brands have remained robust, rising to an average of 9.6x EV/EBITDA in last twelve-month (LTM) 2023, compared to 9.0x EV/EBITDA in LTM 2022. A resilient pricing environment is expected to bode well for prospective sellers contemplating entering the market. In addition, leading premium and luxury brands have recognized the need to manufacture revenue and capture market share, which has fueled recent large-scale consolidation and investment in the segment (more details below).

Luxury Segment Consolidation Accelerates M&A Market

Merger and acquisition (M&A) activity has remained healthy through YTD 2023 with 93 transactions announced or completed, a modest 3.1% decline YOY. The resilience of the M&A market has largely been driven by strategic buyers, who have accounted for 76.3% of total transactions through YTD. Buyers have increasingly scrutinized businesses in the context of recession resilience—seeking sustainable earnings with proven gross margin strength. In addition, brick and mortar players have attracted greater receptivity among buyers through YTD, a contrast from recent years when direct-to-consumer (DTC) was overwhelmingly preferred. The recent acceleration in M&A activity in the sector has been driven by the significant consolidation efforts of large strategic players. Sector players have sought to broaden customer bases and revenue opportunities through inorganic growth. Recent notable strategic transactions are outlined below.

• Tapestry Acquires Capri Holdings (August 2023, $10.3 Billion) – Tapestry (NYSE:TPR) has agreed to acquire Capri (NYSE:CPRI) for an enterprise value of $10.3 billion, equivalent to 9x EV/EBITDA, excluding synergies. Capri is a leading luxury fashion provider with brands including Versace, Jimmy Choo, and Michael Kors. The acquisition combines six unique brands across various consumer segments and product categories, including Tapestry’s Coach, Kate Spade, and Stuart Weitzman.

The acquisition significantly bolsters Tapestry’s customer reach and global presence in the Luxury Goods space. Notably, the addition of Capri enhances Tapestry’s product offerings in areas including Footwear and Ready-to-wear and places increased focus on high-margin categories. The transaction is also expected to provide $200 million in run rate synergies within three years post-closing and double digit earnings per share accretion on an adjusted basis, according to a press release.⁶

• Kering to Acquire 30% stake in Valentino (July 2023, $6.2 Billion) – Kering (ENXTPA:KER) has agreed to acquire a 30% stake in Italian fashion label Valentino for a cash consideration of $1.9 billion, with the option for Kering to acquire 100% of the share capital by 2028. The implied enterprise value of the transaction amounts to $6.2 billion, equivalent to 4.0x EV/Revenue and 16.2x EV/EBITDA. Valentino offers high-end ready-to-wear leather goods and accessories with 211 directly operated stores in more than 25 countries, according to a press release.⁷

Kering recorded modest revenue growth in Q2, with sales rising 2% YOY through the first half of the year, according to its earnings release. Its flagship brand, Gucci, recorded an even slighter uptick in revenue, growing 1% YOY. The investment in Valentino provides Kering with exposure to a complementary brand aimed at capturing an additional customer base through its unique positioning. Moving through year end and into 2024, large strategic buyers may increasingly pursue M&A as a means to supplement slowing growth in certain business segments.

Private equity firms (23.7% of YTD transactions) have largely remained on the sidelines as a higher cost of capital and uncertainty over consumer demand has facilitated caution from the sponsor universe. However, less debt burdensome transactions, including add-ons to platforms, have remained attractive investment options for financial buyers. Historically, sponsors have often preferred workwear or functional apparel providers, choosing to avoid brands that may be deemed vulnerable to fashion risk. This has been evidenced by Riveria Investment Group and Valesco Industries-backed Fabian Couture Group’s acquisition of Uncommon Chef, a leading designer and manufacturer in the Chef and Foodservice Apparel markets (July). Terms of the transaction were not disclosed. In addition, Municipal Emergency Services, a portfolio company of Pratt River Equity, acquired U.S. Uniform & Supply in June for an undisclosed sum. U.S. Uniform & Supply provides uniforms, equipment, and supplies for emergency service personnel.

Apparel, Footwear & Accessories transaction volume is expected to remain robust approaching year end and into Q1 2024. Clarity over the Federal Reserve’s interest rate path may draw more private equity firms to pursue investment opportunities in the space. The strength of the sector will largely be predicated upon the resilience of consumer spending, however, the affluent nature of the consumer base in the Luxury and Premium segments provides it with greater defensibility than lower price categories. Strategics are expected to continue to engage in consolidation to add additional brands to broaden their portfolios.

To provide an update on your business or learn about Capstone's wide range of advisory services and Apparel, Footwear & Accessories sector knowledge, please contact us.

Connor McLeod, Vice President, was the lead Market Intelligence contributor to this article.

Endnotes

1. U.S. Bureau of Economic Analysis, “Consumer Spending,” https://www.bea.gov/data/consumer-spending/main, accessed September 13, 2023.

2. U.S. Census Bureau, “Monthly Retail Trade Inventories Report,” https://www.census.gov/retail/mrtsinv/inventories.html, accessed September 15, 2023.

3. Bain & Company, “Global luxury goods market accelerated after record 2022 and is set for further growth, despite slowing momentum on economic warning signs,” https://www.bain.com/about/media-center/press-releases/2023/global-luxury-goods-market-accelerated-after-record-2022-and-is-set-for-further-growth--despite-slowing-momentum-on-economic-warning-signs/, accessed September 13, 2023.

4. LVMH, “Excellent first half for LVMH,” https://www.lvmh.com/news-documents/press-releases/excellent-first-half-for-lvmh-july-2023/, accessed September 13, 2023.

5. Kering, “Investor Presentation September 2023,” https://www.kering.com/api/download-file/?path=Kering_Investor_Presentation_September_2023_0b7851cd03.pdf, accessed September 13, 2023.

6. Capri, “Tapestry, Inc. Announces Definitive Agreement to Acquire Capri Holdings Limited, Establishing a Powerful Global House of Iconic Luxury and Fashion Brands,” https://www.capriholdings.com/news-releases/news-releases-details/2023/Tapestry-Inc.-Announces-Definitive-Agreement-to-Acquire-Capri-Holdings-Limited-Establishing-a-Powerful-Global-House-of-Iconic-Luxury-and-Fashion-Brands/default.aspx, accessed September 13, 2023.

7. GlobeNewswire, “Kering: Kering And Mayhoola Announce That Kering Becomes A Significant Shareholder Of Valentino As Part Of A Broader Strategic Partnership,” https://www.globenewswire.com/news-release/2023/07/27/2712475/0/en/Kering-KERING-AND-MAYHOOLA-ANNOUNCE-THAT-KERING-BECOMES-A-SIGNIFICANT-SHAREHOLDER-OF-VALENTINO-AS-PART-OF-A-BROADER-STRATEGIC-PARTNERSHIP.html, accessed September 13, 2023.