Fashion IPOs Falter, but Retail’s Potential Remains on Wall Street

The IPO bash is over.

But even with the shares of entrants down sharply and the market discombobulated by war, inflation and the pandemic, investors might just have re-found their love of fashion, retail and consumer stocks.

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Fashion and companies of nearly every stripe benefited from the epic pandemic rally on Wall Street last year, when investors rejoiced in strong consumer spending, government stimulus and how the economy was generally able to adjust to the strains of the pandemic once the first lockdowns and panic ended.

“There was this long ride up in the stock market,” said consultant Matthew Katz, managing partner of SSA & Company. “Everything seemed to be going great everywhere. Wherever you looked the market was rising.”

That bull market is not only backing up now, it’s beset by a host of worries: Russia’s war in Ukraine is scrambling the economy and geopolitical world order; the Federal Reserve has ratcheted up interest rates to back inflation off of 40-year highs, and the COVID-19 pandemic lingers, entering a new and still-uncertain phase.

On Friday, the Dow Jones Industrial Average dropped 981.36 points, or 2.8 percent, to 33,811.40 on signs of more interest rate hikes on the way.

The steadily rising market that fueled initial public offerings last year is now awash in volatility.

Katz described it as “a traders’ market, not a near-term investors’ market.”

“You don’t want to be in the IPO market with uncertainty day-to-day on how the market’s going to react,” he said.

The slowdown in IPOs might say more about Wall Street right now than the retail and fashion industry, where over the last two years weaker players went bankrupt and stronger players cut excess costs and sharpened their focus on digital — and communicated that focus to consumers.

“I don’t think COVID[-19] created the opportunity,” Katz said. “COVID[-19] required that narrative. It was a total shock event. Maybe it was retail’s lifesaver. It was an opportunity for healthy companies to parse unhealthy stores. It was an opportunity for real estate to get reset.”

The fashion industry trimmed down and toned up.

And although inflation is a worry and expected to bite more into consumers’ spending money for fashion, retailers do have other things going for them.

Hemant Kalbag, managing director at Alvarez & Marsal’s consumer retail group, said companies have been upping the retail game. Many, for instance, focused on quicker and better delivery of e-commerce orders as they improved operations.

“Companies that have addressed their core issues in the last couple of years…will be in a great position to benefit from the economy as it opens up,” Kalbag said. “Just like in 2021, when we saw all this acceleration of demand on anything related to home and home renovation, I anticipate we’re going to see tailwinds for demand on fashion as travel and office and social events open up.”

That will help retail IPOs when the market does open.

And there are companies that appear to be preparing to make their moves. Consumer private equity giant L Catterton is said to be looking at an IPO once the market calms, as is one of its investments, Rihanna’s Savage x Fenty.

But for now, offerings are more or less on hiatus. Certainly, a break is warranted.

Last year saw Allbirds Inc., Rent the Runway Inc., On Holding, ThredUp Inc., Poshmark Inc., Olaplex Holdings Inc. and many more stage IPOs. (Some others took a slightly different route to the public market, including Zegna, which cut a SPAC deal, and Warby Parker Inc., which staged a direct listing).

And that was the tip of the iceberg. All told, there were a record 1,035 U.S. IPOs last year, a 120.4 percent jump from 2020, another record year, according to Stockanalysis.com. By contrast, there have been only 89 IPOs to date this year, a year-over-year drop of 79.6 percent.

“The market was due for a slowdown going into 2022,” said Lear Beyer, co-head of equity capital markets at the Wells Fargo corporate and investment bank. “Sustaining that level of activity was nearly impossible.”

Many of the darlings of last year have already fallen out of favor.

Beyer said shares of the companies that went public last year are now down a collective 28 percent from their offering date. And three-quarters of last year’s IPOs are trading below their issuing prices.

“That’s a pretty stark number,” he said.

There are distinctions to be made within the declines, Beyer said, noting companies that have posted earnings before interest, taxes, depreciation and amortization have seen their shares fall about 13 percent since their offering, while those with losses have seen shares drop 50 percent.

“You have this macro environment that’s challenging, but we had a market last year that was focused on growth at all costs,” he said. “Now growth is taking a back seat to profitability.”

So when the IPO market does open back up — as it invariably will — it will be the stronger players queued up and ready to go.

“Companies that are profitable clearly will be leading the resurgence of the IPO market when it comes,” said Beyer, adding that the strongest candidates will also be mature, have scale and operate in sectors with high barriers to entry.

While another rush like the one seen in 2021 isn’t in the cards, Beyer said the retail IPO market is also not going back into the doldrums seen before the pandemic.

“We’re going to see a pretty healthy pipeline of retail IPOs,” he predicted. “It will be higher than it had been historically.”

In the meantime, there is a group of companies that jumped at the chance to raise money and gain a higher profile in a hot IPO market and are now seeking to grow into their new roles.

Rent the Runway, for instance, raised $357 million in its October IPO, but has seen its stock fall from $21 to below $6 a share.

While that signals a marked change in the market’s tone, chief executive officer Jennifer Hyman told WWD this month that “2022 is going to be our year” and that the rental company now has the money it needs to push become cash-flow positive — which would be a milestone for the company.

“There’s a lot more education that we need to do about this model, how different it is, the unique competitive moats that we’ve built,” Hyman said about being public.

James Reinhart, CEO of resale marketplace ThredUp, is also looking to change hearts and minds on Wall Street, having raised $175 million in its March 2021 IPO, but has seen the company’s stock drop to under $8 from $14 at its offering.

“Investors have pivoted away from what were very compelling growth stories for a while,” Reinhart said in a recent interview. “Investors are saying, ‘Hey, maybe I want to change my perspective on some of these growth companies.’ I think investors, though, they’re also a group that really respects companies who are building large businesses, big [total addressable markets] with big moats. And so I think part of my job is to help investors understand that.”

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