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Is The Fashion-Tech Bubble Going To Burst?(Vogue Business)

July 25, 2019

 

The article first appeared on the Vogue Business.

 

Key takeaways:

  • Fashion-tech companies are rapidly going public as investors flock to stocks that promise to attract and service shoppers through algorithms.

  • The average price-to-sales ratio for these companies is significantly higher than pure tech or retail stocks even though many fashion-tech firms are unprofitable and face rising costs.

  • Stock prices have been volatile, although consistently profitable companies like Stitch Fix and Revolve have held on to their gains.

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The hottest thing on a stock exchange these days might be fashion companies with a tech backbone.

 

Resale platform The RealReal raised $300 million in an initial public offering on the Nasdaq last month, just three weeks after influencer-friendly retailer Revolve raised $212 million. These companies join Jumia (African e-commerce), Global Fashion Group (fast fashion in emerging markets), Stitch Fix (clothing via subscription) and Farfetch (luxury e-commerce services) in tapping public funds when markets are frothy. 2019 is on track to be the biggest year for US-based IPOs since 2014, according to data provider Dealogic.

 

Investors have bought into the belief that these retailers can attract younger shoppers through a combination of algorithms and catering to interests like the sharing economy and social media. These companies are also beneficiaries of economic macro trends. The US is enjoying its longest-ever expansion, and the Federal Reserve is set to cut interest rates at the end of the month, leading markets to surge on with speculative zeal.

 

Some investors think cheap money from low interest rates is inflating the value of fashion-tech stocks with untested business models. Gary Wassner, chief executive of Hilldun Corp, a New York-based fashion financier, has likened current valuations for such companies to the dot-com bubble, when investors piled into any stock linked to the internet with little regard for standard valuation metrics.

 

Downsides of retail without the upside of tech

Many of these companies acquired cachet in public markets from wearing the mantle of a high-growth tech company and the accompanying promise of huge profits in the future. “They want to be called tech because it’s glamorous and gets them better multiples,” says Wassner.

 

While there is no widely accepted definition for a fashion-tech company, it’s worth asking whether technology is the core enabler of a company’s business model, says Alex Fitzgerald, a manager in the consumer and retail practice of A.T. Kearney. Richemont gained full control over Yoox Net-a-Porter in 2018, but that doesn’t make the luxury group a tech company.

 

Yet the average price-to-sales ratio for fashion-tech companies is 6.3, compared with 0.43 for a basket of traditional retailers and 4.6 for technology companies, according to YCharts. A higher multiple means more risk since investors are betting on future growth by paying more for each dollar of sales generated today. (Traditional price-to-earnings ratios calculations don’t work for unprofitable companies.)

 

The risk is that these companies have all the costs of fashion firms and none of Silicon Valley’s upside. One of The RealReal’s biggest hurdles to profitability is the authentication process, says Fitzgerald. To combat fears of counterfeits (and a lawsuit from Chanel), the platform employs artificial intelligence and an expensive army of authenticators. The number will likely grow as the reseller seeks to increase sales.

 

While The RealReal has identified white space given concerns about the fashion industry’s sustainability practices, Wassner thinks top-line growth — which jumped 50 per cent last year — will come at the expense of profit. “That’s just not how I look at a healthy, valuable company,” he says. The RealReal declined to comment.

 

As competition in the resale market heats up, existing players will also have to up their marketing spend to make sure they’re the primary port of call for shoppers. Revolve, an early adopter of influencer marketing, will likely have to pay more for communications in the future, wrote Barclays in a recent report. Condé Nast International, which owns Vogue Business, sold its £235 million stake in Farfetch earlier this year reportedly due to concerns over the e-tailer’s heavy investment in communications. A spokeswoman for the publisher declined to comment.

 

Read the full article on Vogue Business.

 

 

 

 

 

 

 

 

 

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