EssilorLuxottica Buys Supreme for $1.5B + Valuation Estimate

July 26, 2024 by Chris Erwin

RockWater Roundup

RockWater analysis to make you a better investor and operator. Today we discuss EssilorLuxottica’s acquisition of Supreme, including the deal value prop, key deal terms, and valuation estimate.

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EssilorLuxottica bought Supreme from VF Corp for $1.5B cash.

Down from the $2.1B VF paid for the streetwear brand in 2020.

Let’s break it down…

💰SELLER: Supreme

Streetwear brand of apparel, footwear, and accessories
Subsidiary of VF Corp
Founded by James Jebbia in 1994
Started as home of NYC skate culture
Digital-first biz model
17 retail stores in US, Asia, Europe
Recent rapid expansion to China, South Korea
Ecom platform across all geo regions
Known for drop model and limited-run inventory
Large resale market on 3rd party platforms

🔴SUPREME CAP TABLE HISTORY

Carlyle Group and Goode Partners bought 50% in 2017 for $1B
VF bought Supreme in 2020 for $2.1 billion

Some additional Supreme context at time of 2020 deal…

Incl $300m incentive plan for Supreme mgmt
Had 12 retail stores
Sales were growing at single digits YoY
VF mgmt said NO synergies were baked into financial growth model

💵SUPREME FINANCIALS for LTM Mar 2023

NOTE: I didn’t see a Supreme breakout in VF financials for more recent periods

$523M revenue
Down $38M YoY, or 7%
Missed $600M forecast
20% of parent co VF’s EBIT

🤝BUYER: EssilorLuxottica

Global maker and distributor of eyewear
Founded 2018 via merger of Italian Luxottica w/ French Essilor
150 brands from eyewear to lens technology
Owned brands: Ray-Ban, Oakley, Oliver Peoples, Vogue Eyewear
Owned retailers: Lenscrafters, Sunglass Hut, Pearle Vision
Licensed brands: Chanel, Prada, Burberry, Versace
150 countries
18,000 stores
200,000 employees
Public on Euronext Paris Market

💶EL FINANCIALS (in € Euros)

Stock performance as of 7.22 at 10:40am ET

€197.15 share price
Mkt cap of €90B
Down 1% since 7.17 deal news
Up 9% YTD
Up 12% YoY

FY 2023 YoY results per public filings (PE 12.31.23)…

Total revenue increased 7.1% to €25.4B, from €24.5B
Total operating profit of €4.2B, up from €4.1B or 7.7% YoY
EBITDA of €6.1B, up €21M YoY
€2.4B in free cash flow
€2.6B in cash
€11.7B in total debt (incl 3.2B lease liabilities)

1H 2024 YoY results per public filings (PE 6.30.24)…

Total revenue increased 5.3% to €13.3B, from €12.9B
Total operating profit of €2.4B, up from €2.3B or 8.5% YoY
EBITDA of €3.5B, up €161M YoY
€970M in free cash flow
€2.2B in cash
€11.9B in total debt (incl 3.5B lease liabilities)

💰PARENT CO OF SELLER: VF Corp

Global maker of branded lifestyle apparel, footwear and accessories
Know for outdoor, active, and workwear brands
Owned brands: Vans, The North Face, Timberland, Dickies
In midst of turnaround plan due to slowing revenue, high debt
Public on NYSE as VFC
Founded 1899

🪙VF CORP FINANCIALS

Stock performance as of 7.22 at 10:13am ET

$16.02 share price
Mkt cap of $6B
17% uptick since 7.17 deal news
Down 14% YTD
Down 18% YoY

FY 2024 YoY results per SEC filings (PE 3.30.24)…

Total revenue decreased 11% to $10.5B, from $11.6B
Total operating loss of ($34M), down from $328M profit
$139M net loss in cash and equivalents
$674M in cash
$5.7B in LT debt (incl $1B current portion)

🤝DEAL DETAILS

$1.5 billion in cash
Expected close by CY 2024
Dilutive to VF EPS in 2025
I don’t know LTM 3.30.24 Supreme revenue, but if stayed same YoY, implies around 2.8 to 3.0x revenue multiple, and 9x EBIT multiple

✨DEAL VALUE PROP

Helps EL be “ambassador of style and innovation”, and drive eyewear sales
Direct connection to “new audiences, languages, and creativity” i.e. target Gen Z
Access to Supreme’s ecom platform and customer targeting data
Position Supreme alongside higher end brands (80% of EL sales are luxury)
Cross-brand collabs, like how Supreme did w/ VF via The North Face and Timberland
Distinct brand model of Supreme had limited synergies w/ VF’s integrated model
Deal proceeds will help VF pay down debt as part of turnaround plan

🤝POST DEAL OPS

Supreme founder Jebbia will be TBD involved with brand under new owner
Will maintain “own space within our house brand portfolio and complement our licensed portfolio”
Supreme may become incubator for new EL products and tech
No planned changes to Supreme biz model

🧐WHAT I FIND INTERESTING & DEAL INSIGHTS…

I write a lot about media, agency, and creator deals…so why write about Supreme?

A few reasons:

Supreme’s digital first / limited drop / collab biz model, and EL’s planned cross-sell strategy post acquisition, have much crossover with many creator-led product and DTC businesses, particularly as the creator-led businesses explore ways to scale and grow.
There’s a lot of public info on the deal, so a lot for us to learn from.
I think many creators and creator economy observers also follow the Supreme brand, likely for reason #1 above.

This is EL’s first foray into apparel…

Some analysts think the EL / Supreme deal can be a guinea pig for the industry. Typically it’s hard to manage multiple product categories under one parent company e.g. apparel and eyewear. But this deal could be a chance for Supreme to benefit from EL’s manufacturing and distribution expertise.

There’s also an opportunity for EL to learn from Supreme’s digital first biz model by applying new sales and distribution strategies to select brands in its overall eyewear portfolio, particularly the owned and licensed luxury brands. These brands could experiment with limited drop models and paid media targeting leveraging 1st party customer data.

Shoutout to the ModernRetail article on the deal, some good breakdowns in there.

Decline of streetwear and Supreme cool-factor?…

Per Bernstein analysts on the deal… “It appears to be geared towards streetwear, at a time when streetwear brands seem to be seeing significant lower engagement from consumers worldwide.”

Back in 2019, a potentially very prescient Virgil Abloh, Off-White founder and artistic director of Louis Vuitton men’s, said that streetwear was going to wane over the next decade.

And specifically about Supreme, industry observers talk about the company’s flagging cultural relevance, resulting from low product sell-thru as well as rapid expansion and store growth to new Asia markets like China and Korea. Supposedly Supreme has opened more stores in the past 4 years than it did in the prior 2 deacdes prior!

This likely explains why there’s been a high-profile assignment of a new creative director, which is meant to fill the void from Tremaine Emory’s much-publicized departure back in 2023.

This raises the point about what EL is really buying…which based on deal press releases and the above context, is that it’s simply a low-cost bet for EL to:

Bring in a new product line in apparel and test cross-sell synergies
Learn about digital-first sales, marketing, and distribution models

To expand on the low cost point, the deal represents 1.5% of total EL enterprise value ($1.5B / $100+B), and at a reasonable valuation of a 9x EBIT multiple, which is lower than market comps for consumer durables and apparel, which our research shows are in the 11-14x range. Of note, the deal revenue multiple is coser to 3x which is higher than the 1.7-2x revenue multiples we see per comps, and could imply that Supreme margins are significantly higher VS peers.

Overall, I assume the EL deal, research, and advisor teams are smart enough to know the general market trends around the fashion and product categories they’re buying into. Thus, if there’s potential future category headwinds, then EL *should be* ensuring that low-case integration synergies and its deal valuation gives EL ample cushion to minimize any loss relative to lessons learned from the experiment.

Although when it comes to media and fashion, financial ROI is not always a primary deal driver – ego and passion often find their way, or lead, M&A dynamics. I don’t have a deep history tracking either of these companies, so I’ll leave this point at that.

Meta exploring 5% stake in EL…

A day after the Supreme deal was announced, it was reported by the WSJ that Meta is in talks to acquire a 5% equity stake in EL. Reminder that EL and Meta have an existing wearables partnership, where EL is the production partner for the Ray-Ban smart glasses, which are part of Meta’s consumer products portfolio. First launched in 2021, the 2nd gen of the glasses in Oct 2023 have sold more in a few months than the last ones did in a few years, per EL’s CEO.

FTC Considerations…

Another good final point from ModernRetail…

“The Supreme acquisition also comes at a time when the M&A market is in flux. For instance, the FTC has moved to block Tapestry’s $8.5 billion proposed acquisition of Capri. That creates the potential for more unusual deals like the one between EssilorLuxottica and VF.”

The concerns for the Tapestry / Capri deal are that the combination would eliminate competition between Coach, Kate Spade, and Michael Kors.

Understanding FTC considerations are important particularly during an election year, where the stance on M&A policy could change with a new administration. As it relates to 2024, it gets even more interesting when you dive into the particulars of Trump and his new election running mate JD Vance, the latter of which has expressed support for FTC Chair Lina Khan, who’s taking an aggressive stance on antitrust.

Of note, this point is more relevant for larger deals and where there is more material adverse impact to consumer utility due to decreased competition, which means that many of the creator economy deals I cover in this blog likely haven’t hit that threshold…but that will change as our industry grows!