The first rule for any initial public offering is to show some sort of growth. Ideally, it's in the profit column. Investors need reason to get excited about a new stock.
Vancouver's Aritzia Inc., which filed for an IPO Thursday, checks that box.
In fiscal 2016, which ended in February, the women's fashion retailer saw its profit nearly double to $32-million. The best part: That jump was driven by a 17-per-cent boost in same-store sales – or those from stores that were open during the previous fiscal year. It isn't relying solely on an expensive expansion strategy to juice revenue.
Aritzia has also been building some buzz, which is crucial in retail. The chain's expanding in the United States, where it now has 18 stores, and a clever public relations strategy has put the retailer on the radars of key stylists – who then put its clothes on their artists. Taylor Swift was recently spotted wearing the retailer's Moxon dress. Bonus point: It was on date with beau Tom Hiddleston.
So why the secrecy surrounding the IPO? The underwriters behind it – CIBC World Markets, Merrill Lynch Canada and TD Securities – are being coy about deal size, releasing very little of the typical information used to help market an offering.
There are a few factors likely at play. It's August and feels like half of Bay Street is on vacation. Why not wait till September to file? Probably because there's been chatter of a fall suite of IPOs. There are benefits to being the first out of the gate, because it means there's ample buy-side cash sitting around. It's also tricky for underwriters to give their clients much guidance as to how deals will sell right now.
It's been a dismal year for IPOs, and the last to come to market, mortgage finance company MCap Corp., had to pull its $275-million offering despite strong demand during its first few weeks of marketing. Jitters after the Brexit vote ultimately spooked buyers.
Then there are women's fashion woes. "The market in total has been flat, at best," said retail analyst Sandy Silva at NPD Group. It's been especially troublesome for retailers who fall in the middle ground between fast-fashion players such as Zara and H&M and luxury outlets such as Saks and Nordstrom. Historic middle ground players such as Jacob have filed for bankruptcy or bankruptcy protection in the past few years.
Aritzia operates in that same niche, but its profit has jumped, which is encouraging. The down side: Its bottom line hasn't been booming for very long. In fiscal 2015, the retailer saw its profit drop 19 per cent to $16-million. Investors only have one full year of encouraging growth to rely on. (Although the first quarter of the current fiscal year was strong as well.)
The short history of strong profits is a bit troubling because women's fashion is notoriously fad-oriented. A few years back, J Crew had momentum: Michelle Obama was routinely seen in its clothes. Fast forward to 2014 and the retailer endured a half-billion-dollar writedown on its stores.
Aritzia's growth is largely predicated on e-commerce expansion and beefing up in the United States. So far, e-commerce has been encouraging. A few years ago, the company installed a new creative team who changed the art direction of their website, which included bringing in a photographer to consult on things such as lighting (which matters more than you can imagine when shooting clothes). The website has earned praise across the industry.
As for the United States, success is a little less certain. It's tough for niche Canadian brands to expand south of the border because it's so much harder to build brand awareness – hence the celebrity PR strategy. To make it work, Aritzia will need ample funds – however, money raised from the IPO won't flow to the company's coffers. Founder Brian Hill and partial private equity owner Berkshire Partners are taking all of the money raised.
That also puts a bigger spotlight on Aritzia's debt, $145-million worth of which comes due in 2019. Unlike Cara Operations Ltd., which used its IPO proceeds to repay debt in 2015, Aritzia seems to be betting that solid markets will last so that it can do subsequent stock sales to help pay back the loans. The company declined to comment.
However, Aritzia has a wealth of intellectual capital to help with its expansion. Its board of directors includes Aldo Bensadoun, who has helped oversee Aldo's successful global strategy, as well as former Lululemon chief financial officer John Currie. Lululemon is one of the few Canadian retailers that really exploded beyond its home borders.
Any interested investors will have to accept that Aritzia doesn't plan on paying a dividend, and its capital structure will include multiple voting shares, controlled by the current owners.
The good news is that private shares saw their price jump in the past year, according to internal valuations. They were estimated to be worth $4.17 each at the end of May, up from $3.19 the year prior. It's encouraging – and also a benefit to current owners, whose options carry a weighted average exercise price of $1.68.
Editor's note: An earlier version of this story said Le Chateau has filed for bankruptcy or bankruptcy protection. Instead, the retailer recently sought at least $25-million from its founder to help stay in business.
Tim Kiladze