Canada: Aritzia IPO leads to warning from market watchers
The shares traded as high as $19 a share, $3 above the $16 a share set in the run-up to the IPO. They closed at $17.71 at the end of Monday, the first day of trading, after more than 8.5 million shares had traded hands. The stock closed the week at $17.50.
The dual-class shares means 97 per cent of the voting power remains with existing shareholders, founder and chief executive Brian Hill, and the private equity backers, Berkshire Partners of Boston.
That means new shareholders won’t have voting control, be able to elect directors, name auditors or have control over succession planning, which is “very concerning,” University of Toronto professor Anita Anand told Business News Network.
She noted the company’s own prospectus lists the dual class structure as a risk factor.
“The dual-class shares are quite a negative signal to buyers,” said Kai Li, a finance professor at UBC’s Sauder School of Business. “This is a red flag.”
The retail company, which has 75 stores in Canada and the U.S., will not get any of the money from the initial public offering. The total raised was $460 million with most of that being split between Hill and Berkshire. The IPO was made through a syndicate of underwriters led by CIBC Capital Markets, Merrill Lynch Canada and TD Securities.
Hill, who founded Aritzia in 1984 and has steadily built the business around its own clothing lines such as TNA and Wilfred, will retain 41 per cent of the voting power. Berkshire will have 55.6 per cent of the voting power.
“People who bought shares last week won’t have any (voting) power,” said Li. “You better hope the founder will make the right decisions. But cashing out for $400 million, what’s the incentive going forward?”
Li also noted Aritzia would be entering a “crowded” market where there is strong brand loyalty, like J. Crew, Gap and Banana Republic. She also noted Aritzia has several different designer labels on different clothes lines rather than a single brand.
The offering, which comes 32 years after Hill started the company and during a slow year for Canadian public offerings, is the biggest recent IPO for a Canadian retailer. Hudson’s Bay raised $365 million in 2012. Last year, Sleep Country Canada Holdings raised $300 million.
“This IPO is an important milestone for Aritzia and is a testament to the continued dedication and passion of our people and the loyalty of our customers,” Hill said in a joint statement with Jennifer Wong, president and chief operating officer.
“As we look forward to this next chapter, we remain committed to delighting our customers with beautifully designed products, an aspirational shopping experience and exceptional customer service,” it said.
The company didn’t respond to requests for further comment.
Aritzia aims to increase its annual revenue to between $1.1 billion and $1.2 billion by the end of fiscal 2021, more than double its current annual revenue of $542.4 million. It also plans to open 25 to 30 new stores by 2021, including 10 in the next two years.
Taking a company public is necessary “if you want to scale up to the international market,” said Canadian retail consultant Doug Stephens, founder of the Retail Prophet.
He said Aritzia may be following the pattern set by Lululemon Athletica, the Vancouver-based clothing giant that expanded to the U.S. after establishing its brand in Canada. It had problems with fabric in 2013, caused a hit to its reputation for quality that affected sales and its stock.
“However, the apparel market is very different these days,” he said, because the market, with H&M, Zara, Forever 21 and Uniqlo coming on to the global fashion scene, is competitive and millennials’ taste in fashion changes rapidly.
He said pressure from investors to increase profits could open the company to quality concerns if they cut corners on fabric, for instance, because “the unrealistic expectations of investors often push companies to make moves that isn’t necessarily good for the brand.”
Aritzia may face the challenge of not have the same brand appeal in the U.S. as the existing big players but “consumers are always looking for the next big thing” and it’s important to establish stores in the big fashion centres, such as San Francisco and Manhattan, where Aritzia already has opened a store as part of its U.S. expansion.
“Wall Street wants high returns and they want them every quarter,” said industry watcher and blogger Caitlin Kelly, author of Malled: My Unintentional Career in Retail.
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She said she was a fan of Aritzia clothing but worried that pressures to produce profits was going to cause the company to cut corners that could harm its position in the market as a retailer that fits between low-end and high-end fashion retailers.
“They’ve hit the right mark on fashion that is simple, elegant and affordable,” she said, referring to its newest line called Babaton.
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