Apparel Quarterly Update - Fall 2020

Apparel Quarterly Update

Fall 2020

Apparel Quarterly Update | Fall 2020

About Our Practice

Duff & Phelps' Consumer group is among the most active middle-market advisors, providing sell-side, buy-side and capital raising services for clients worldwide. With expertise in the consumer, food, restaurant, apparel and retail sectors, our professionals have executed more than 150 transactions over the past 12 years.

The Duff & Phelps platform provides in-depth coverage of the apparel, footwear and accessories industry through dedicated, bicoastal consumer teams and 75 international offices. Duff & Phelps is a trade name for Duff & Phelps, LLC and its affiliates. Read more at .

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#4 middle-market M&A advisor over the past ten years2

Proven Execution

150+ consumer M&A and capital raise transactions over the past 12 years

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Category focus drives thought leadership and builds invaluable relationships with buyers and investors alike

Customized Approach

Successful track record of premium value transactions driven by hands-on execution and creativity

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Approximately 4,000 employees across 75+ offices in 25 countries, with an extensive presence in the U.S., Europe and Asia

See page 22 for data sources

Our Apparel Team

Corporate Finance

Joshua Benn

Managing Director, Global Head of Consumer and Apparel Corporate Finance +1 212 450 2840 joshua.benn@

Henry Wells

Managing Director, Head of U.K. M&A Advisory +44 (0)20 7089 4876 henry.wells@

Howard Johnson

Managing Director and Canada Leader M&A Advisory +1 416 597 4500 howard.johnson@

Special Situations

Brian Little

Managing Director, Consumer and Apparel Corporate Finance +1 310 598 4358 brian.little@

David Lu

Managing Director, Head of China M&A Advisory +86 21 6032 0608 david.lu@

Robin Kim

Vice President, Consumer and Apparel Corporate Finance +1 424 363 0016 robin.kim@

Brian Cullen

Managing Director, U.S. Restructuring Advisory, Distressed M&A and Special Situations +1 424 249 1650 brian.cullen@

Kroll ? Risk Solutions

Geoffrey Frankel

Managing Director, U.S. Restructuring Advisory, Distressed M&A and Special Situations +1 312 697 0114 geoffrey.frankel@

Jason Smolanoff

Managing Director, Global Head of Cyber Risk +1 213 443 6055 jason.smolanoff@

Valuation Services

Sherine Ebadi

Associate Managing Director, Business Intelligence and Investigations +1 424 249 1650 sherine.ebadi@

Transaction Advisory Services

Myron Marcinkowski

Managing Director, Consumer Products +1 678 916 2525 myron.marcinkowski@

Jacques Giard

Managing Director, Head of France Transaction Advisory +33 1 40 06 40 70 jacques.giard@

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Apparel Quarterly Update | Fall 2020

Second Quarter in Review

Green Shoots

Following a Q1 dominated by global containment efforts to combat the spread of COVID-19, the global economy gradually started to re-open during Q2, which has led to a strong snap-back in the public markets and broad improvement across key economic performance indicators. Recent developments of COVID-19 vaccine production have further bolstered global economic recovery heading towards the second half of the year, notwithstanding continued macroeconomic uncertainty from the impending U.S. presidential election.

The unemployment rate continued to improve, dropping from 10.2% in July to 8.4% in August, which is by far the lowest rate since shutdowns started to occur in March.5 The retail sector, specifically, added 249,000 jobs in August as stores nationwide continue to re-open.5 Retail sales rose for a third straight month at 1.2% in July (clothing specifically increased 5.7%), following an even stronger June where retail sales rose 8.4%.4 Furthermore, consumer spending in July increased 1.9% compared to the prior month, indicating a continued rise in consumer confidence.6 Time will tell when the economy reaches a full recovery, but most agree we are heading towards the right side of the curve.

While the retail and apparel sector was significantly affected by the pandemic, the industry has experienced a steady recovery consistent with the broader economy. Apparel and retail brands were able to help soften the blow from retail store closures during the peak of the pandemic, fueled by a large increase in eCommerce sales ? a trend that was sharply accelerated by COVID-19 and is expected to continue for the foreseeable future. Additionally, retail sales have started to rise over the last three months as stores have gradually re-opened and consumers have become more willing to shop brickand-mortar, comforted by in-store safety precautions and more education on how the virus spreads. Both of these trends have led to many public apparel and retail brands reporting positive earnings in Q2, with a more favorable outlook for the rest of the year.

Our quarterly apparel report aims to identify trends and provide insights across the apparel sector, focusing on key themes, issues and opportunities. In this issue's sector spotlights, we explore key strategies employed by successful direct-to-consumer-focused brands and the impact the post-COVID-19 retail environment is having on both brands and retailers. We hope you find this report and future editions to be a useful source of information, and as always, please do not hesitate to reach out to us if we can be helpful in any way.

Apparel and Retail Composites data can be found on pages 11-22 See page 22 for data sources

Table of Contents

3

Second Quarter in Review

4

Trends and Insights

6

Sector Spotlights

8

Recent Apparel Transaction Activity

9

Public Company Data

Q2 2020 | By the Numbers

Stocks experienced a strong recovery, with the S&P 500 increasing 27.3% following a 20% decline in Q13

U.S. retail sales rose 18.3% in May as the shutdown thawed, rebounding from a 14.7% decline in April4

$ Public apparel and retail company valuations (as LTM EBITDA multiples) averaged 11.7x and 14.7x, respectively3

Valuations (as EBITDA multiples) for branded apparel and fashion expanded by approximately 2.5x3

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Apparel Quarterly Update | Fall 2020

Trends and Insights

1 Innovation = Gains

Successfully engaging consumers digitally and leading them to a path-topurchase has been more "art" than "science" over the past several months. Many brands are finding success by focusing on innovative styles as consumers are increasingly responding favorably to novelty and freshness. This recent push has allowed certain brands opportunities for differentiation and growth amid a challenging economic backdrop.

While some "new" products are minor modifications to previous ones, others are completely new and expand into unexplored markets. For example, Decker Brands was successful with the launch of its new UGG slipper, a shoe that includes key features of the traditional UGG boot that historically resonated well with customers, effectively creating a sense of originality while maintaining the semblance of newness.

Similarly, Columbia Sportswear made significant investments to enhance its footwear styles and build out a more robust apparel innovation pipeline, while digitally native brand Ten Thousand continues to utilize its existing followers to generate demand prior to product release.

Followers of Challenger Brands are More Active and Engaged7

(Instagram like / follower ratio)

1.9

1.3

1.4

Legacy Challenger

0.1

0.1

0.2

0.3

Research shows that the average person today buys 60% more items of clothing than they did 15 years ago7

42% of men and 39% of women surveyed note Nike as the most innovative brand in the industry8

All trademarks, trade names or logos referenced herein are the property of their respective owners. See page 22 for data sources

2 Buy Now, Pay Later

Optionality for customers to purchase goods now while deferring payment to later has allowed a broader set of consumers access to products they desire but may not be willing or able to pay for at the time of sale and/or in one lump sum. Generally deemed more attractive to younger, price-sensitive customers, the "Buy Now, Pay Later" option with popular payment plan apps like Afterpay, Klarna and Affirm have lowered the barrier to purchase in a way credit cards have not due to flexible, interest-free payment plan structures.

Brands and retailers that participate pay between 4.5 to 5.9 cents per transaction to the apps. In return, the apps pay the brands/retailers the full purchase amount, which effectively shifts the risk and burden of collecting the amount in installments to the payment plan apps. While only charging a small fee and assuming all risk, payment plan apps allow for brands and retailers to reach a more diverse customer base and provide greater affordability for their products.

Early participants introducing Buy Now, Pay Later include Farfetch, Marchesa, Givenchy and Burberry. The list has continued to grow throughout the pandemic with newer entrants including digitally native brands Bonobos and Gymshark.

COVID-19 is Changing the Way We Pay (% change in total spending by payment type)9

22%

-32%

-7%

Cash

Debit and credit cards

BNPL

The IOU apps are reporting that average order value is typically higher, and checkout conversions surge 30% for retailers using BNPL10

40% of consumers say they'd be more likely to complete transactions if offered options like BNPL at checkout 10

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Apparel Quarterly Update | Fall 2020

Trends and Insights

3 Back to (Online) School Shopping

Although traditionally a catalyst for apparel and footwear sales and an early indicator of demand for the holiday season, this year's back-to-school shopping kicked off with much softer undertones. Of the largest 25 public school districts in the U.S., only two have made it possible for students to attend in-person classes, and most schools have resorted to distance-only learning, which has significantly impacted students' need for new clothing and footwear--at least for the time being. 11

The back-to-school shopping season this year has been somewhat of a wild card. Some retailers believe the softness will stretch throughout late fall and into 2021 as in-person classes gradually return. As a result, some of the largest brands have changed their approach to cater to online school; for example, Kohl's adjusted its tagline for the fall to "heading back or logging in" and allocated areas of its website to "at-home learning."

Most brands have experienced strong sales growth since late July, signifying strong momentum to retail recovery, and while the overall extent of back-to-school sales will likely be lower than 2019, consumer sentiment and shopping behavior appear to be headed in the right direction.

Reduced Spend on Clothing and Accessories ($ in billions)12

Computer and hardware

$2.0

Gadget

School supplies

Clothing and accessories

Personal hygiene products and desk/tables

$14.7

$2.9 $5.4 $3.8 2017

$14.9

$5.9 $2.8 $3.7 2018

$15.0

$6.1 $3.6 $3.1 2019

$12.5

$5.0 $4.6 $4.0 2020

Back-to-school clothing and accessories may decline 10% YoY.13

For the first time in last decade, back-to-school household spending on electronics will likely surpass the spend on clothing/accessories for K-12 shoppers.11

All trademarks, trade names or logos referenced herein are the property of their respective owners. See page 22 for data sources

4 Trade Up or Trade Down

Midrange brands are getting squeezed once again but perhaps a bit harder this time around. Consistent with prior economic contractions, consumers have shown a preference to trade up to a "premium" level or trade down to lowerpriced items that provide more value rather than "settle" for something in between.

Eighty-one percent of U.S. consumers believe the pandemic will lead to a deep recessionary period and nearly half are concerned about how this might impact their personal finances.14 In an effort to mitigate the potential impact, many plan to spend less on fashion (i.e., "non-essential" and event-driven apparel) while seeking value-driven purchases of core items. More than four out of ten U.S. consumers expect brands to provide discounted pricing or run promotions once brick-and-mortar stores reopen.14

However, not all midrange brands are created equal. Certain brands, irrespective of where they sit on the price point spectrum, have proven what customer loyalty truly means through a formidable line of products with brand authenticity, superior customer service and engagement that exude a level of cachet that cannot be replaced.

Fashion Industry Sales Growth by Region, Category and Segment (YoY % growth)15

Value

Discount 2020

Luxury

Affordable 2019 Luxury

Premium /bridge

Midmarket

4-5%

4-5%

2-3% 2.5-3.5%

3-4% 3.5-4.5%

1.5-2.5%

5-6%

The luxury sectors have accounted for almost 80% of the industry's economic profit growth.15

Looking at total return to shareholders over the past three years by value segment, luxury and value clearly outperformed other segments, delivering 22% and 14% respectively.15

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