By Callum Turcan
Maker of footwear, handbags, sunglasses, and various other accessories Cole Haan Inc (TBD:CLHN) has filed to go public. One thing that makes this planned IPO particularly interesting is that Cole Haan was free cash flow positive in both fiscal 2018 (period ended June 2, 2018) to fiscal 2019 (period ended June 1,2019), generating $35 million and $38 million in free cash flows, respectively. The firm plans on trading on the NASDAQ Global Select Market, run by Nasdaq Inc (NDAQ), under the ticker CLHN. Additionally, please note that after the planned IPO, funds advised by British private-equity firms Apax Partners LLP and Apax Partners are expected to continue to own a “majority… of the shares eligible to vote in the election of our directors” according to Cole Haan’s S-1 filing with the SEC.
Financial Overview
From fiscal 2018 to fiscal 2019, Cole Haan’s GAAP revenues grew by 14% to $687 million while its GAAP gross margin expanded by almost 190 basis points. As its SG&A expenses rose by a tame 6% during this period, Cole Haan’s GAAP operating margin surged by just under 490 basis points year-over-year in fiscal 2019 and more than doubled versus fiscal 2018 levels. Rising revenues, expanding gross margins, and due to tame operating expense growth, expanding operating margins are all very appealing.
Footwear was responsible for over 92% of Cole Haan’s fiscal 2019 revenues, highlighting how the future success or lack thereof of the firm’s footwear line is really what will drive its financial performance going forward. Accessories like handbags and sunglasses are more for incremental revenues and gross profit, at least at this stage.
Direct-to-Consumer Strategy
The strength of Cole Haan’s financials can be traced back to its direct-to-consumer (abbreviated ‘DTC’ or ‘D2C’) model, which was responsible for almost 60% of its fiscal 2019 revenues. Please note that firm’s like Nike Inc (NKE) are aggressively pursuing the DTC model as well, as cutting out the middleman (wholesalers, certain e-commerce sites and retailers, etc.) and building a closer relationship with their customers (arguably, the DTC model helps foster greater brand loyalty by allowing the seller to control the environment, specialize offers, gather more data on its customers, and launch products that better cater to consumer demand) is thought to be a huge boon for the consumer discretionary industry (and many others). Back in June 2017, Nike announced it was launching its ‘Consumer Direct Offense’ which is underpinned by its ‘Nike Direct’ online sales strategy which many have hailed as a success so far.
Cole Haan is selling more expensive and specialized footwear and accessories, so having a good understanding of its customer base and potential customer base is key. A look at its website across several footwear categories highlights that most if not all (outside of promotions) of its offerings start at over $100 per item and go higher from there. The e-commerce marketing platform Yotpo noted in a 2019 survey that ~63% of consumers care about price when it comes to inspiring brand loyalty, which followed product at ~78%, so a combination of competitive pricing (relative to what consumers would consider a comparable product) and maintaining product quality is very important. Cole Haan appears to be doing quite well on this front.
Debt and Credit Facilities Overview
As of June 1, 2019, Cole Haan had $38 million in cash on hand and $214 million in current assets (inclusive of cash on hand) versus $7 million in short-term debt and $113 million in current liabilities (inclusive of short-term debt). The company also had $273 million in long-term debt, giving Cole Haan a net debt load of $242 million at the end of its fiscal 2019.
Liquidity needs are supported by Cole Haan’s asset-based lending facility with Wells Fargo & Company (WFC) which has $115 million in borrowing capacity and matures on July 11, 2023, keeping in mind the credit line has been upsized and extended in the past. At the end of Cole Haan’s fiscal 2019, the credit line had $103 million in available borrowing capacity. The company also has a JPY200 million Yen overdraft facility bearing interest and a JPY150 million Yen guarantee line with Mitsubishi UFJ Financial Group Inc (MBFLF), with no outstanding borrowings on that facility at the end of fiscal 2019. ~17% of Cole Haan’s fiscal 2019 revenues were generated outside of the US, and most of that business is conducted in Japanese Yen or Canadian Dollars.
Most of Cole Haan’s total debt load comes from the firm refinancing its old term loan facility with Jefferies Finance LLC, a subsidiary of Jefferies Financial Group Inc (JEF), with funds provided by JPMorgan Chase & Company (JPM) through a new term loan facility. The refinancing activities took place in calendar year 2019. Here’s more from Cole Haan’s S-1 filing;
On February 12, 2019, the amended term loan was refinanced, which resulted in (i) the repayment of the existing outstanding balance as of $292.1 million and (ii) the Company entering into a new credit agreement with JPMorgan Chase Bank, N.A. in the amount of $290.0 million (the “refinanced term loan”). The refinanced term loan is a eurocurrency loan which bears interest at a variable rate based on LIBOR plus 5.50%. Principal payments of $1.8 million are due each quarter through February 2022 and increase to $3.6 million thereafter, with the remaining principal due on the maturity date of February 12, 2025.
Over the next two fiscal years (fiscal 2020 and fiscal 2021), Cole Haan owes just a little over $7 million per fiscal year in principal repayments (please note this doesn’t include interest payments) on this term loan, which steps up to ~$9 million in fiscal 2022 and up again to ~$15 million in both fiscal 2023 and fiscal 2024. In fiscal 2025, Cole Haan would be on the hook for just under $236 million in principal repayments. It’s possible the firm will refinance this burden. We view this maturity schedule as quite manageable given its free cash flow profile and upcoming IPO proceeds, assuming everything proceeds as planned.
Concluding Thoughts
Given the strength of Cole Haan’s financials, this is an IPO we are keeping a close eye on. The DTC trend is taking off and those that can effectively roll out and capitalize on the new business model are likely to perform quite well relatively speaking, in our view.
Luxury Goods (Established Brands Industry) – EL LULU NKE PVH REV SIG UA UAA VFC
Luxury Goods – Ultra & Aspirational: FOSL, CPRI, LVMHF, RL, TIF, TPR
Related: WFC, JPM, JEF, MBFLF
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Callum Turcan does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.