Cole Haan (CLHN) has filed to raise $100 million in an IPO of its common stock, although the final amount may be as high as $200 million.

The firm designs and manufactures premium quality casual and dress shoes and sells through third party retailers and direct to the consumer.

CLHN has grown revenue and operating margin at the same time it has been focusing on its direct-to-consumer [DTC] approach to the market.

Greenland, New Hampshire-based Cole Haan was founded to manufacture premium dress and casual shoes for both men and women.

Management is led by CEO Jack Boys, who has been with the firm since 2013 and was previously CEO at sports shoe maker Converse and has over 25 years experience in the retail industry.

Below is a brief overview video of Cole Haan's approach to designing and manufacturing its shoes:

Source: Cole Haan

Cole Haan has received at least $237 million from investors including Apax Partners, a private equity firm.

The company sells its products through its online website, through branded retail stores and other locations.

In addition, the firm sells through certain e-commerce sites such as Amazon  (AMZN) - Get Report and Walmart  (WMT) - Get Report.

Sales and marketing expenses as a percentage of total revenue have been dropping as revenues have increased, from 41.5% for FYE June 2018 down to 36.2% for the 26 weeks ended November 30, 2019.

The sales & marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend, rose to .4x in the most recent reporting period, from 0.3x in the fiscal year ended June 1, 2019.

According to a 2019 market research report by Grand View Research, the global market for all types of footwear was an estimated $208 billion in 2018 is forecast to grow at a CAGR of 3.8% from 2019 to 2025.

The main drivers for this expected growth are continued innovative designs and fabrics as consumers demand and appreciate more options and higher quality products.

Below is a chart of the U.S. footwear market by type and its historical activity and expected future growth trajectory:

footmkt

The Asia Pacific market is expected to grow at the fastest rate and be the largest market by region from 2019 to 2025.

Major competitive vendors include:

  • Lee Cooper
  • Adidas America
  • PUMA
  • Nike
  • Geox
  • Timberland
  • Skechers USA
  • Ecco Sko
  • Wolverine Worldwide

Cole Haan’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increasing gross profit
  • Uneven gross margin
  • Growing operating profit and margin
  • A swing to negative cash flow from operations

Below is a recent profit and loss statement, with full year periods according to PCAOB standards:

colepl

As of November 30, 2019, Cole Haan had $10.8 million in cash and $548 million in total liabilities.

Free cash flow during the twelve months ended November 30, 2019, was a negative ($7.3 million).

Cole Haan intends to raise $100 million in gross proceeds from an IPO of its common stock, although the final amount may be as high as $200 million.

Management says it won’t see any of the net proceeds from the IPO; instead selling stockholders, which haven’t been identified yet, will receive all of the net proceeds.

Listed bookrunners of the IPO are BofA Securities, Morgan Stanley, J.P. Morgan, Goldman Sachs, Jefferies, Baird, Cowen, Piper Sandler, and Stifel.

Commentary

Cole Haan is seeking public capital to hand to its investors, so unfortunately the firm won’t have any new resources with which to fuel its growth plans.

This is not uncommon for private equity controlled firms going public and is a negative signal in my view.

Typical of private equity-owned IPO candidates, CLHN has a relatively high amount of debt, weighing on its ability to use resources for its growth plans.

Additionally, private equity firm Apax Partners will control the company post-IPO, so prospective investors will need to take this into account.

The firm’s financials show moderate revenue growth, net profits but a swing to negative cash flow from operations and negative free cash flow for the trailing twelve months.

Selling, G&A expenses have been dropping as revenues have increased, a positive signal; its sales & marketing efficiency rate has also risen to 0.4x.

The market opportunity for technology innovation in casual and dress shoe design and function is large and expected to grow only moderately in the medium term.

CLHN is focusing on a direct-to-consumer approach in addition to its existing distribution approach, as it believes the additional costs will be outweighed by higher margins and greater knowledge and ownership of the customer and concomitant ability to design better products.

Operating margin is nearing 10% in the most recent half-year period, an increase over previous figures, so this may indicate that management is executing well on its DTC approach.

Valuation will be key for this moderately growing, private equity owned company.

(I have no positions in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)