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2019 Hasn’t Been Kind to IPOs. Madewell and Old Navy Are Taking Note.

U.S. IPO activity is stuck in a troubling rut —see: WeWork’s spectacular implosion—and that could jeopardize initial public offerings for both Madewell and Old Navy.

Over the course of 2019, several fashion brands and e-retailers have completed initial public offerings, including Levi Strauss & Co., Kontoor Brands Inc., Revolve Group Inc. and The RealReal Inc. But the year also has seen on-demand transportation firms Uber Technologies and Lyft Inc. struggle out of the gate, while the recently listed Peloton Interactive LLC opened down 6.9 percent from its offer price. That opening-day pricing gave the connected-fitness and media firm the distinction of being among the worst trading openers for a mega-IPO firm since 2008.

Then there’s recent fiasco at We Co., formerly known as WeWork, which saw its $47 billion valuation slashed by more than half, further intensifying investors’ skittishness when it comes to public offerings. And shortly before that Hollywood talent conglomerate Endeavor Group Holdings Inc. in September pulled its IPO the day before its market debut due to weak demand, stating that it would review market conditions to determine a better time to go public.

Will Madewell, the J. Crew Group spin-off, and Old Navy, springing forth from Gap Inc., even get to complete their public offerings?

Sources have said over the past few days that given the issues connected to the Madewell IPO as well as the approaching holiday season, the company has elected to pause its public offering plans until 2020 gets under way, to get a better read on the IPO market and see how November and December retail sales come in.

A Madewell spokeswoman did not return a call for comment by press time.

Madewell is a seeking a valuation just shy of $3 billion, according to the registration statement filed for Madewell Group Inc, under the name Chinos Holdings Inc., with the Securities and Exchange Commission on Sept. 13. But the denim-heavy has a couple of hurdles to clear to get to the $2.93 billion IPO gate.

Credit ratings firm Moody’s said it is using a more conservative model for Madewell’s enterprise value, pegging the firm at closer to the $1.2 billion to $1.9 billion range, which is more appropriate both because “retail valuations are broadly under pressure and vary meaningfully,” and due to the number of botched IPOs in tech, the firm said.

Madewell’s projected $2.93 billion enterprise value also garnered some pushback from J. Crew lenders, who as part of the terms of a debt swap last year have the right to say yay or nay on either a sale or a public offering of the brand. The lenders’ alternate proposal gives them some equity in the spun-off firm as a debt swap, but no agreement has been reached yet.

An investment banker, who has spoken to a few potential investors, said the company is “over-valued” at the $2.93 billion valuation, and maybe even at $2 billion mark, but thinks a successful IPO would be closer to the lower end of Moody’s conservative valuation range.

If anything, J.Crew is perhaps hoping Madewell will draw a valuation around the $2.93 billion number, as it plans to use the proceeds to pay down about $1.7 billion in long-term debt, the investment banker said.

Walter Loeb, a former retail analyst and now consultant, doesn’t believe the time is right for either Madewell or Old Navy to complete their IPOs, given the economic backdrop. But in the case of Old Navy, a delay or decision not to proceed is also compounded by the departure of former Gap CEO Art Peck.

“There’s a big question of succession right now at Gap Inc.,” Loeb said, “and maybe [Old Navy CEO] Sonia Syngal might be interested in the CEO opening at Gap.”

At a September investor day presentation, Syngal shared the brand’s path from $7.9 billion in net sales in 2018 to its target goal of $10 billion over time as a standalone company, noting Old Navy’s scaled supply chain, and its inventory flexibility to drive profits at the store level through localization.

On the surface, it would appear that Old Navy’s business has fared better than its brand sibling and could warrant a spin-off. Old Navy does $8 billion in annual volume, with a three-year comp average of up 3 percent, and commands mid-teen margins, according Ike Boruchow, retail analyst at Wells Fargo.

In contrast, Gap has $5 billion in annual sales, with comps down 3 percent over the same period, while its margins are in the very low single digits. Boruchow isn’t so sure current metrics mean a spin-off is the right path.

“With strong multi-year performance as the rest of the portfolio has struggled, it has long been hypothesized that an Old Navy spin-off could be highly valuable to investors given the concept’s markedly different results,” Boruchow said regarding the spin-off proposal at the time Peck’s departure was disclosed. “Unfortunately, Old Navy has struggled in 2019, calling into question the advisability of this plan.”

Calling off the Old Navy spin-off could be a positive for Gap, Boruchow said Monday, because of the “$700 million to $800 million of cash–one-time [spin-off] expenses–that would re-enter the Gap enterprise value.”

Gap is slated to report third-quarter results on Thursday.

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