VIDEO: Apparel Footwear & Accessories M&A Update

“How has the market changed since last year?”

What a difference a year makes. Last year, at this time, direct to consumer brands were disrupting the industry, experiencing rapid sales growth as brick and mortar retail chains were challenged by the physical store shutdowns.

But physical retail is not dead, as we’re seeing in today’s market. In fact, retail sales have recovered to pre-pandemic levels, hitting record highs—fueled in part by stimulus money and rising prices.

Now, instead of the pain of having to deal with physical store shutdowns, operators in the space are increasingly facing a myriad of other challenges, including number one: supply chain shortages—making it difficult and more costly to get raw materials and finished goods to the consumer on time.

Secondly, a tight labor market which is making it more difficult for operators in the space to find and keep people.

And finally, an inflationary environment which is putting immense pressure on cost structures for businesses in the space.

“How are sector participants navigating these challenges?”

The key has been a diversified mix of both sales channels and avenues of marketing spend with regard to sales channels.

The pandemic offered online retailers the opportunity to rationalize their store footprint, and shrewd operators took advantage of this by selectively augmenting their store footprints in prime locations.

In addition, we saw online DTC brands also expand into physical retail, which is best done carefully.

Notably, digitally savvy companies, especially those able to mine their customer base, can analyze their customer base to inform the profile and the location of the ideal retail stores.

Furthermore, this provides some of the advantage of being able to analyze which demographics their brands resonate with most. With regard to marketing channels, companies with loyal customer bases have been able to weather the storm.

During any economic cycle, companies need to adapt. They cannot be caught flat footed, and they need to not be so reliant on any one form of marketing spend. So it’s best to be able to experiment with new channels such as SMS text or TikTok.

And in addition, they can use retail as a way to acquire new customers.

“What about the supply chain and inflation?”

Supply chain disruptions and the associated inflation have undoubtedly presented challenges for operators in the space.

They’ve materially impacted profit margins across the board for many operators, both middle market private companies and large public multinational companies alike are both assessing their production processes and looking for areas for improvement, especially in this current market environment.

This includes the potential reshoring of supply chains as a top agenda item for many top executives in the space. Additionally, effective inventory management is proving critical. Many businesses have missed sales opportunities due to a lack of product availability.

We are finding that private business owners that command control of their supply chain and implement effective inventory management systems are poised to capture significant revenue opportunities in the current market climate.

“What does this all mean for the M&A market?”

Despite the challenges that I described today, the M&A activity in this market has persisted at a robust pace in 2022, proving to be resilient.

61 transactions have been announced or completed year-to-date, which is roughly on par with a year ago.

However, as the macroenvironment becomes choppier, we expect buyers to be more selective in their opportunity screening moving forward.

For the rest of 2022, we don’t think it’s a time to be going into market with “stories”, but rather with companies that are performing well in the current market, and that includes those who have diversified their sales channel mix and their marketing spend and those who have command over their supply chain, as we believe these companies will be receiving premium valuations.

“What do I need to know going forward?”

A few things to keep in mind: first of all, e-commerce—the long term growth engine of the sector—has its limits. While eminently scalable and over the long term likely to grow faster than physical or retail, there are added costs that one must consider for e-commerce such as shipping discounts and returns.

In addition, as discussed earlier, retail sales are not dead, and in fact, omnichannel operators are outperforming in the current market.

Third, supply chain issues do persist, but in our view are likely to be short term in nature. Effective inventory management and evaluation of manufacturing partners are proving key to success in this environment.

And finally, the M&A market does remain robust, especially for companies performing well, with few signs of slowdown.

For more insights, including ESG trends and key transactions, please read the full Apparel, Footwear & Accessories M&A Report. You can also subscribe to have the reports automatic emailed to you, and please feel free to reach out directly via my contact info in the report.

Thank you very much and have a great day.