Listed luxury: Ermenegildo Zegna’s decision to go public comes at a crossroads for high-end fashion
Luxury Italian brand Zegna has decided to go public via special purpose acquisition (SPAC), in an interesting blend of the old and the new.
The move to go with a listing model that some still consider untested for the long term comes after a track record of over a century of excellence in high quality textiles and clothing.
Potential investors would do well to look at the company’s strong fundamentals as well as the tailwinds in the luxury market, as well as ask themselves why the company is coming to the public markets. Do the company’s financial metrics justify a high valuation? Is the management capable of executing their strategy? These are all pertinent questions given so few luxury fashion brands are publicly traded.
Zegna’s history stands it in good stead. Its origin was the fabric looms of Ermenegildo Zegna’s father, since then it has become a staple in high-end retail, while retaining a strong control of its wholesale business. This has enabled it to maintain its brand provenance. This demonstrates a sophisticated vertical integration going back a century, something that has been traditionally difficult for manufacturers. In the last decade, a similar model has been extremely successful for brands such as Tesla, Lululemon and Apple.
Chief Executive Gildo Zegna stated that “scale is becoming important”, but this commitment to growth can be a double-edged sword in an industry where the ability to set prices and manage supply is a brand’s defining factor.
LVMH has been one of the shining examples able to successfully straddle both challenges. It is possible to do, but it requires sophisticated management and execution in line with this tight strategy across the business. A plethora of brands such as Aston Martin, Jack Wills and J Crew have all found themselves unable to establish the pricing power needed to drive luxury margins, exacerbated by growth demands promised with their IPOs.
Zegna’s decision begs the question of how the luxury market overall is faring, especially given Gildo Zegna admitted that maintaining a luxury brand has become “very challenging”. Many prospective customers have increased their spending power during lockdown, yet tension between western governments and China leave many luxury exporters in a precarious position. Zegna’s luxury peers will be watching this float with considerable interest.
The risks associated with listing around increased scrutiny and pressure from investors are particularly acute for the luxury sector. Private ownership allows for long-term vision and execution with complete autonomy, enabling these brands to implement a strategy that spans generations rather than financial quarters. LVMH shows that luxury is not inherently incompatible with being public, as they provide the growth demanded by public investors distributed strategically among a tightly managed stable of brands. Many luxury brands do not have this option.
As with all IPOs today, there is very limited financial data available for potential investors and very little opportunity to interrogate it. It does, however, appear Zegna has some way to go to build returns to what would be regarded as true luxury levels. The family will retain overall control of the company, but there will be a question mark over their motivation levels given a more challenging environment and their increased bank balances.
The SPAC model has a tendency to transfer value to the sponsors and original investors. Typically they have been for companies with short term trading records and no profitability, neither of which apply to Zegna. Given the company’s long track record, heritage and desire to be classed as a luxury stock, it is an unusual choice for the brand.
It is also worth considering the wider luxury sector and its pivot towards Asia. Zegna was again decades ahead of competitors by becoming the first luxury label to open a Chinese store in 1991, as well as being one of the first to enter India in 2001. With growth for luxury stocks anticipated to come from emerging and growing markets in Asia and the global South, Zegna’s established presence will be attractive. But there is also a concern that the Chinese market may restrict foreign brands in the coming years, which would devastate the luxury industry overall.
There is a lot to like about Zegna as a business, and luxury goods as a sector for investment. Whether investors get behind the IPO may come down to the case the family makes for the float, and the extremely significant effects it will have on the business.