Why the True & Co. acquisition makes perfect sense.

SAN FRANCISCO — When a little known firm acquires a startup (especially in e-commerce), people tend to view it is as an odd move. Heads are scratched, frowns quickly form, and the focus gets placed on the firm(s) that “should’ve” bought the business, rather than the one that did: “Why didn’t ‘so and so’ spring for this one, instead?”

You can be sure this question was asked about Phillips Van Heusen’s (PVH) purchase last month of San Francisco-based lingerie upstart True & Co. It’s an eyebrow-raising purchase on the surface. Yet dig a little deeper, and you’ll find that the merger does in fact make a lot of sense.

What the lingerie market looks like right now.

  • Two big threats. Incumbents — Victoria’s Secret the obvious big name here — are facing two major marketplace threats, both enabled by the e-commerce groundswell within the last decade. On one side sits Amazon, who essentially has the ability to create a direct-to-consumer competitor to Victoria’s Secret — and launch it at scale — any time it wants (and shutter it without much fuss, if it’s not performing). On the other side sit a growing cabal of new niche upstarts like Lively, Negative Underwear, White Rabbit, Beija Flor Lingerie, Journelle, and True & Co. that are more focused and targeted in their offerings, and pack a big collective punch.
  • Niche upstarts are giving customers what they want. Both sides are putting the squeeze on legacy players, and the niche players in particular are chipping away at larger players’ market share by giving female customers (of all body shapes) exactly what they’ve been asking for for some time now: Proper fitting intimates from brands that speak their language and fully understand their lifestyles.
  • Data plays a big part. Increasingly too, data science and algorithms are providing opportunities for upstarts in the market to leapfrog their established competitors. It’s a safe bet to assume that Amazon will also soon pounce on this category and ensure that Prime customers (all 65 million of them) get access to a private label brand that’s functional and well-priced. Direct-to-consumer businesses that are data driven also provide owners a direct line to their customer base, providing key data on purchasing habits, locations are their strongest markets are, which items and colors perform best, and in what new products to bring to market based on demand.

Poor performance by True & Co., but lingerie is up for grabs.

Back to the deal. True & Co. was not profitable, and the sale price is rumored to have been in the tens of millions range. Founder Michelle Lam had raised a total of $13M from a group of investors which included Crosslink Capital, Cowboy Ventures, and Tony Hsieh’s VTF among them. According to TechCrunch, “investors mostly got their money back, but nothing more”.

No doubt some will see the transaction as a failure by founder Lam to effectively scale the business and guide it to profitability. That’s true in terms of the pure financials today, but given the dynamics of the lingerie sector, and the fact that the stakes are still being decided, True & Co. could find a positive way forward over the long run. More to the point: This is not a distressed asset PVH has purchased here, merely an underperforming one.

Parsing apart the deal.

The facts: True & Co. will become part of a stable of brands that seem like an odd match: Calvin Klein, Tommy Hilfiger, and Heritage Brands, which include the likes of Speedo and Izod. But True & Co. actually benefits here: They’ll be able to tap into PVH’s industry expertise and operations: supply chain, business analytics, and merchandising. This is critical considering that Lam has admitted that she’s struggled in keeping up with demand — not uncommon for growing modern luxury companies.

To this point PVH’s CEO Emanuel Chirico had this to say in the PVH press release (bolded by us for emphasis): “Today’s announcement illustrates our commitment to driving innovation across our business and demonstrates our commitment to making strategic investments in our digital platforms to support our long-term growth initiatives. We believe that we can leverage the analytics tools of this data-driven company, while leveraging PVH’s intimates category expertise, including global brand management, product know-how and supply chain.

How it all fits together: PVH gains a data-driven business whose insights can help its existing stable of brands better harness e-commerce. Taking a step back, this is a solid M&A deal, and both parties gain from the transaction. This is a bolt-on acquisition that will drive PVH — and True & Co. — over the long term.

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  • Anthony Coombs

    Very good read. I agree with everything stated here in the article. What True and Co was attempting to do is extremely difficult as an independent but with PVH as a parent it has a much better chance at not only surviving, but thriving.