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What if Lululemon Met Crowdfunding? This Company Might Be Their Offspring

Hylete Raising $6.25 Million in Shares, $5 Million in Bonds

 

The typical apparel company has the weight of the world on its shoulders: There are whims of fashion, tenuous relationships with retailers, and the risk of simply making too much of the wrong thing. Could there be a business model that cuts through the stress?

Meet Hylete, a maker of high-end athletic apparel that’s currently raising up to $6.25 million in new shares and $5 million in 12%-coupon bonds, both under Regulation A+. Hylete isn’t in a hurry to go public so the shares won’t list right away. The company fits into the popular but rather crowded landscape of luxury workout apparel and so-called athleisure, where exercise gear winds up being worn in everyday settings.

But Hylete has an approach that sets it apart. Called “Hylete Project,” the company frequently pitches new designs or color schemes to customers and allows them to buy them early at a discounted price. If a particular item doesn’t get enough support in advance, Hylete doesn’t produce it. In a similar spirit, the company carefully analyzes survey data before cutting cloth for a new design.

To see the benefits, consider a recent plan to produce three new workout bags. After pitching the ideas to customers, the company decided on a lower-cost approach to generate maximum returns. “We had planned to make three new designs, but instead did the one that people overwhelmingly liked,” Hylete Founder and CEO Ron Wilson told RegAResearch in an interview. “The next closest bag wasn’t even close.”

Keeping such a pulse on consumer desires could save Hylete from a retail nightmare. Just look at Under Armour, which makes similar but slightly downmarket athletic apparel. After years of screaming sales growth and a stock price to match, the company faced a product-line overextension and brand crisis. The stock has since collapsed to a small fraction of its peak and Under Armour is in the process of slashing its number of items dramatically.

“We can take smaller bets out of the gate,” Mr. Wilson said, referring to how much it invests in new products. In fact, upfront customer dollars were enough to fund a large percentage of the production cost of a recent line of shoes. That helps reduce the need for expensive loans as the company grows.

Of course, the company doesn’t constantly create brand-new items. Some staples like shorts or t-shirts don’t need to go through the “Hylete Project” process. But the company still enjoys the advantages of being an almost pure direct seller without retail partners or physical stores. Thanks to a high level of engagement with customers, it commands healthy repeat business.

The benefits of being a direct seller are multifold. One, Hylete can avoid the risk of a retail partner struggling or shuttering, which can force deep discounts and brand damage. Two, as Lululemon has acknowledged for its business, margins are far higher from Web sales than from owned stores.

Another reason for customers to prefer Hylete over, say Lululemon, is that it’s priced significantly lower. In men’s shorts, for instance, Lululemon has products priced at $88 or and even more while Hylete’s most expensive shorts are $68.

To be clear, the company won’t be large enough for some time to be considered a threat to the likes of Lululemon, Adidas, or Nike, giving Hylete plenty of clear runway. With only about $10 million in trailing sales, Hylete can perhaps use its community-based design and inventory planning even more extensively in the future.

Indeed, Hylete’s fundraising efforts are not just an effort to secure capital but another way to build the brand itself. Part of the current stock offering includes several customer perquisites including 50% off regular priced items and a shopping credit equal to 10% of the total investment. That means an investor who buys $1000 of shares effectively gets $200 of retail spending power right away. Mr. Wilson calls it “Amazon Prime with an equity kicker.”

But are the shares a good investment in their own right? Assuming the share offer is fully subscribed, the company would have an equity valuation of $39 million and an enterprise value of $35 million. That implies a multiple of 2.6 times 2018 sales, if revenue lands in the middle of Mr. Wilson’s target of $12 million to $15 million.

Based on that multiple alone, the shares aren’t exactly cheap. Core revenue has grown at a roughly 35% rate recently and Mr. Wilson expects overall sales in the same range assuming the company has sufficient access to capital. Companies with higher growth rates have fetched similar multiples, investment bankers say.

The good news is the company expects to be EBITDA positive in 2018 and net income margins should be 10% in future years. So a reasonable earnings multiple could soon be in sight.

Perhaps more importantly, the company probably has less execution risk than most in its sector, thanks to its focus on customer interaction in the planning process. It’s not the first to utilize crowdfunding in apparel: The likes of Tailor Stitch and Gustin crowdfund for different variations of menswear. But in the premium athletic category, Hylete has taken enough of a lead to win the race.

Contact:

Editor@RegAResearch.com

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