Following Quiet Retail Success, Fender Guitar's $200M IPO Makes Some Noise

March 15, 2012 – 2011 may go down as the year of the tech IPO, but the excitement has not ceased during 2012. Over the past 14 months, technology companies have lined up for public funds with buzz and excitement not seen since the last internet bubble.

With Facebook’s IPO looming and Yelp’s recent entry, tech and social media seem to be the only IPO groups turning heads with more traditional IPO candidates like consumer branded goods largely ignored. But do they deserve the disproportionate attention? PrivCo, The Private Company Financial Data Authority, suggests a closer inspection of the headline catching techies and a second look at some dark horse retail IPOs.

Tech IPOs:

In January, PrivCo reviewed 2011’s largest tech IPOs, but let’s revisit this list (plus two other recent tech IPOs: Yelp and Zillow). In aggregate, this head-turning dozen of IPOs raised a staggering $5.8 billion in capital. While this is certainly an impressive figure, it is worth noting that the top-5 fundraisers (Yandex, Zynga, Freescale, RenRen, and Groupon) are trading at a weighted-average deficit (based on capital raised) of -9% below their initial offering price. Furthermore, of these 5 “bread-winners,” only Yandex is actually making a profit.

Though these losses have been offset by solid premiums seen at Linkedin (+105%) and Angie’s List (+21%), our newsworthy tech IPOs have brought shareholders an average loss from offer price to March 14’s close of -1% with many bleeding much worse than that – pretty remarkable given the large buzz premiums these companies gained at debut. If this group has taught us one thing aside from finding skydiving deals, building playlists, and growing virtual vegetables, we learned that a massive IPO and trendy product cannot overcome poor business models and weak financials.

Thus, PrivCo has decided to look under the shadow cast by these online giants to some consumer retail stalwarts who generated quiet IPO successes amidst all the tech noise of 2011. In contrast to their hyped tech counterparts, these companies boast established business models that have proven resilient through the economic downturn. Furthermore, our retailers operate in industries with barriers to entry greater than a simple web domain, protecting them from the fate of the Myspaces and Napsters of yesteryear.

Retail IPOs:

Buoyed by the combined $3 billion raised by Prada and Michael Kors, 2011’s retail IPOs ranged from fast food to luxury goods and collected $4.6 billion (compared to $1.4BN in 2010) in aggregate. A more impressive sign of enduring success is each of these retail performers trading at a sizeable premium since their respective IPOs over the past 14 months. This is quite a feat given how the retailers have achieved their strong post-IPO growth under the radar, while the floundering IPOs of their tech counterparts have claimed the spotlight. 

While their product offerings are traditional, the growth of these recently IPO’d retailers certainly is not. Michael Kors’ explosive growth well-over 100% in just 3-months ranks as the second-highest of all IPOs in 2011 and tops a strong retail list whose weighted average-growth since IPO is over 60%. GNC, Dunkin Donuts, and their IPO’d peers have gained from a strong retail year, which has quietly outperformed the broader market and most certainly the tech names despite the US Credit Downgrade and Euro crisis.    

Consumer retail IPOs found success in 2011 and the early part of 2012 due to returned consumer confidence and a rediscovered appetite for luxury goods. Consumer retail companies also benefit from simpler business models than their tech or online counterparts, allowing for easier scalability. The S&P 500 Retail ETF is at an all-time high, and several retail names currently sit in the IPO pipeline. Companies like Fender are looking to make some noise, hinting that 2012 may just become a year of retail IPOs making news.

Looking to cash in on the quiet retail success, Fender Musical Instrument Corporation – known for their famous guitars used by Buddy Holly, Jimmy Hendrix, and Eric Clapton – filed their IPO on March 8. PrivCo gives you the high and low notes of Fender’s S-1.

High Notes:

• Total Revenue for 2011 grew 13% YOY to $701 million, eclipsing privately-held Gibson’s $500 million to make Fender the No.1 guitar seller in the US. 
• Fender returned to profitability of $3.2 million in 2011 after a net loss of $17.3 million in 2010 attributable to a paint supply issue which halted production of guitars to the tune of $26.2 million. (Fender notes that similar supplier issues could harm future results.)
• Operating margins grew from 27% to 31% in 2011 as Fender increased product prices and reduced discounts.
• Fender filed to raise $200 million through an initial offering of its Class A stock to be listed under the ticker “FNDR” on Nasdaq, however, Fender did not disclose how many shares it intends to sell or a price target for the shares.
• Fender notes the musical instruments industry is highly fragmented and served by various companies including independent instrument makers, large corporations, and technology based manufacturers in which Fender foresees future strategic acquisitions and partnerships.
• Fender’s sales channels are also fragmented and represent acquisition targets as its sales were to independent dealers (59% of sales), national, merchant or online dealers (23%), and third party dealers (17%).
• With nearly 47% international sales, Fender identifies new appetites for guitar music in emerging Asian markets as a big opportunity which is in-line with the successful growth stories of Michael Kors and Prada in that region.
• Fender’s line of products addresses 73% of instruments within the $15.8 billion global musical instrument industry, and the Company’s co-branding initiatives with Apple, SAP, and Hard Rock Cafes, offer opportunities for traction beyond music.

Low Notes:

• Fender did not release its target valuation for the IPO; however, based on comparable publicly traded instrument-makers Steinway and Yamaha’s revenue multiple below 1x, PrivCo calculates Fender is valued at nearly $650 million, or .95x revenue (before adjustments for its debt).
• Of the $200 million IPO proceeds, Fender intends to use $100 million to pay down $246 million of debt with the remainder to finance working capital, corporate expenses, and acquisitions of businesses or products.  So Fender will continue to have net debt even after raising its IPO funds.
• Despite the breadth of Fender’s product offerings, guitar and amp revenue was $504 million or 72% of total revenue.
• Despite noting potential strategic acquisitions and $100 million to support this growth, Fender has stated there are no planned acquisitions at this time.

Fender’s $200 million IPO has momentum from a group of retail predecessors whose successful IPOs have flown relatively under the radar. Certain analysts are skeptical of Fender as the public offering is going to help balance its books, and the Company has stated there are no planned acquisitions at this time. However, a strong holiday season puts Fender and retailers alike in a good position to leverage this success into a strong IPO. S&P has already upgraded Fender from ‘negative’ to ‘stable,’ excluding its reduced leverage post-IPO in the rational. Additionally, Fender’s highly fragmented market and potential Asian growth story offer a breadth of acquisition targets for the other $100 million as the opportunities present themselves. And finally, the iconic Fender name offers a portfolio cool-factor that will definitely lure some baby-boomer investors who can finally claim to own a Fender. Given Fender’s established global brand and outlined growth opportunities, PrivCo believes Fender will rock its IPO.