Rose-colored Ray-Bans shade brand rehab realities
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
By Sharon Lam and Jeffrey Goldfarb
TORONTO/NEW YORK, July 26 (Reuters Breakingviews) -Staying fashionable is hard. Apparel maker VF VFC.N, whose financial well-being depends on doing so, has given up trying with Supreme. The streetwear maker’s cred suffered during its nearly four years under the same roof as Vans, Dickies and North Face. EssilorLuxottica ESLX.PA, the Franco-Italian eyeglasses giant, sees a brand restoration opportunity, albeit through rose-colored Ray-Bans.
VF is offloading Supreme after boss Bracken Darrell decided the sweatshirt and skateboard vendor clashed with other attire in the $6 billion company’s closet. EssilorLuxottica agreed to pay $1.5 billion, a near-30% discount to the price tag four years ago. Supreme’s $540 million of annual sales through March fell considerably short of making it the $1 billion brand VF had envisioned.
Supreme’s red box logo became a status symbol after designer James Jebbia opened his first store 30 years ago. Growth has stalled, however, and net profit tumbled more than 20% in the year to March 2023, the latest annual stretch disclosed by VF.
Turning things around will be a challenge, even for $100 billion EssilorLuxottica. As it stands, the acquisition looks financially unattractive. Supreme generated $116 million of operating profit in the year to March 2024. Assuming no increase in the coming year and after subtracting tax, the remainder implies a roughly 6% return on investment, less than the approximately 8% cost of capital that Morningstar analysts estimate for VF. It would take some $40 million of annual synergies just to break even, according to Breakingviews calculations.
Cost savings appear limited and EssilorLuxottica CEO Francesco Milleri instead emphasized the appeal of reaching Supreme’s diverse customer base. Cross-branding collaborations offer limited upside, but turbocharging Supreme’s sales would probably mean foregoing cachet to chase mass-market appeal instead, as Abercrombie & Fitch ANF.N and others have done to rejuvenate themselves. Such initiatives tend to have limited shelf-lives, however, because the brand’s value gets diluted along the way.
Fitting rooms are strewn with the scraps of formerly stylish looks. American Apparel, for example, has struggled to regain steam under new ownership since going bankrupt twice. Supreme is in far less dire straits, but lost its top spot as the most-traded clothing brand on resale app StockX two years ago. Consumers, especially young ones, are fickle, and always on the hunt to find the next hot trend. EssilorLuxottica may have belatedly grabbed hold of a fading one.
Follow @sharonlam_ and @jgfarb on X
CONTEXT NEWS
Eyeglasses maker EssilorLuxottica said on July 17 that it would acquire streetwear brand Supreme from VF for $1.5 billion in cash to add creative expertise and help expand its reach to new customers.
VF said its strategic review concluded that Supreme’s business model allowed for limited synergies.
JPMorgan is advising EssilorLuxottica while Goldman Sachs and UBS are advising VF.
Graphic: VF and EssilorLuxottica share prices have diverged https://reut.rs/3Wiif5T
Editing by Lauren Silva Laughlin and Pranav Kiran
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