The DTC business model has revolutionized the way brands connect with their consumers, putting the power of choice and influence directly into the hands of the latter. As we dissect the world of DTC menswear, two brand archetypes stand out, each offering a unique lesson in exit strategy based on their attributes. For every well-known brand like Sporty & Rich with adoring fans and national awareness, there is a True Classic with fans of its own. One has $30 million in annual revenue (according to Glossy’s coverage of S&R) and the other recently reached $240 million in annual revenue with $25 million in expected EBITDA (according to Business of Fashion). It’s more than likely that you heard of the $30 million revenue company – Sporty & Rich was written about in the New York Times, Gentleman’s Quarterly, Vogue, Fashionista, Hypebeast, and Refinery29 in just the last month. True Classic has had no such luck, receiving zero consumer fashion press over the last 30-60 days.
One brand is Cool Hand Luke and the other is Steady Freddy. But these are just classifications; there are countless examples of this inefficiency in the market. Here, with brand names anonymized, is an in-depth comparison of a Steady Freddy vs. a Cool Brand Luke:
Brand No. 1: The “Steady Freddy” Mature Regional Powerhouse
With 13 years under its belt, Steady Freddy boasts an estimated annual revenue of $60 million, reportedly EBITDA profitable, with an ample omnichannel strategy. The company commands regional brand awareness, driven by owned storefronts and proximity to its original CEO. It’s carved out a niche in the market with its commodity product. While the brand created the category (think Chubbies for short shorts), it is now one of several brands in direct competition for its customer. Despite its robust performance and established history, it’s pushing it precariously past an exit window.
The strength of Freddy lies in its potential EBITDA profitability and regional recognition becoming a draw to a potential private equity suitor who is prepared to properly expand the company beyond its current market limitations and brand development capabilities. You can almost see a young analyst suggesting to a junior partner:
Hey, this brand could go national. No one really knows them. Also, how do you say the name again?
This brand, while not a household name in most of the country, has established itself as a reliable entity within its sphere of influence. This reliability and proven track record could make it an attractive acquisition for larger corporations seeking to tap into a dedicated customer base or diversify their portfolio with an established regional brand. The brand’s revenue outpaces its brand equity. This can be viewed positively by many observers.
But the constraints faced by the brand, including the product’s increasingly commoditized nature and shifting preferences in raw material usage, may limit its exit optionality. Private equity firms might be reluctant to acquire a brand with a slower, methodical growth trajectory and is beyond the typical exit window for private equity-backed retailers.
Brand No. 2: The Nationally Known “Cool Brand Luke” Media Darling
On the flip side, Luke, with its estimated $12 million revenue, speaks the language of the new-age consumer. Almost entirely DTC, it enjoys national brand awareness, even though it operates on a much smaller revenue scale. In the last 30 days, Gentleman’s Quarterly, Fashionista, InStyle, WWD, Highsnobiety, and Esquire have written about the company. Known for its creativity, it stands as a beacon for design innovation in menswear, even if this means its bottom line has not yet found its way to profitability.
A brand with such strong national awareness and a reputation for creativity could be an attractive proposition for strategic buyers looking to rejuvenate their product lines or tap into a younger, more diverse demographic. Its direct consumer link could also offer invaluable insights into market trends, giving potential acquirers an edge.
However, its inability to scale towards enterprise level of revenue is a red flag. Without a proven model to generate consistent growth, potential acquirers might question its long-term viability. The inability to raise additional capital further accentuates this concern, indicating potential market skepticism about its future growth.
Finding the Middle Ground: Exit Optionality Explored
So, how would exit optionality manifest for these two distinct brands? It does so by achieving a blend of their unique attributes.
For Steady Freddy, its regional stronghold and profitability offer stability. An exit strategy for this brand might lean towards acquisition by larger entities looking to tap into a mature market or diversify into proven commodity sectors. Cool Brand Luke, in contrast, could pitch its exit strategy based on brand equity rather than current revenue run rate. Its national brand recognition and design prowess are its tickets. A strategic merger, where another brand seeks to harness its creative energy and national footprint, could be the optimal route.
Both brands, though, face the limitation of trying to succeed in an unforgiving market for DTC-born retailers. This presents a conundrum and, frankly, even with the best attributes of each, success is not guaranteed. According to Pitchbook, the recently acquired DTC intimates brand Parade earned a valuation of $203 million in September 2022 after raising the last of its total in venture funding ($56 million). In the subsequent year, the brand had to reset its valuation while the overall market experienced a funding slowdown for this category of brands. Profitable or not, Cami Tellez’s tenure as CEO of the retailer stands out. Upon the news of the acquisition, this was one of several quotes by Tellez:
In three and a half short years, this awe-inspiring team generated over $125 million in revenue, acquired 750,000 passionate customers, and captured over 1 percent of a highly competitive market.
The pursuit of brand’s achieving Steady and Cool is difficult. And in the case of the two menswear brands above, the dueling stories provide a glimpse into the difficulties of managing growth. While both have passionate followers, the perception of brand cachet varies. For one, it might be the reliability and longer-than-usual history; for the other, it’s the cutting-edge creativity,a nationwide presence, and a reliability on earned media.
In the final analysis, exit optionality for DTC menswear brands isn’t just about the numbers on a balance sheet. It’s about the narrative each brand weaves, the niche it carves out in the marketplace, and the potential it promises for the future. Somewhere in the middle of these factors, the exit story for each brand will be written. The ones that succeed in finding a home typically do one thing better than the rest: they account for their blind spots. From a consumer perspective, perceived value and price elasticity rely on this practice.
The cool brands work on becoming steady and the steady brands strive for the cool factor.
By Web Smith