Rapha’s 12 year financials just landed in our inbox. Here’s what we learned.

LONDON — Updates on the Rapha-LVMH acquisition saga have been few and far between since news about LVMH’s pursuit first broke in late November. We reported on why the deal might make sense to LVMH around that time, but since then, there hasn’t been much to report.

That’s not to say we, or Lean Luxe subscribers, haven’t been poking around. In person or over email, lips have been sealed, mouths shut, shrugs offered. Questions about the deal casually lobbed at Rapha Cycling Club employees by subscribers have been politely rebuffed. Emails sent by us to Rapha decision makers, and to those who might be privy to the process at LVMH’s acquisition arm, L Catterton, have either to gone unanswered or replied to with the standard, “I’m not involved” or “can’t comment”.

But recently, something remarkable happened. Rapha’s twelve year financials, spanning January 31, 2016 to October 31, 2004, landed, unannounced, in our inbox. The document comes from a trusted source who has direct dealings with Rapha, and the details therein help to offer some much needed texture — not only on the minute details of the Rapha operation — but on the LVMH deal as well.

Before we dive directly into the numbers, here’s why these financials are important both for understanding Rapha — and the modern luxury space more generally.

Why this matters:

  1. Still (relatively) secretive. The modern luxury space still remains a rather close-to-the-vest sector when it comes to financials (although we’re working on chipping away at that). This makes sense, given that nearly all companies, save for a handful, are private. Naturally, though, we jump at every chance to reveal figures whenever possible here at Lean Luxe.
  2. Transparency — beyond just supply chain. Transparency is a core principle in the modern luxury space, but it’s typically (and almost strictly) applied to only supply chain and manufacturing. In today’s startup era, financial transparency also matters a great deal too. At Lean Luxe, a central mission is to help flesh out the the financial and economic details of the modern luxury sector. This is certainly a step in that direction.
  3. Rapha’s a whale. Rapha is what we classify as a Blue Chip MLC (modern luxury company). We define that, somewhat subjectively, by influence, popularity, and strength and consistency of branding; and objectively, by revenues, age, and infrastructure. Rapha is now 13 years old (at a time when most MLCs are around 5-7), has 15 standalone Clubhouses (stores), brought in £48.8M ($62.1M) in revenues for 2015-16, and functions as more of a network or community, rather than just a sportswear maker. As such, we consider it critical to give you a better sense of the brand’s financial state, particularly in the context of the potential LVMH purchase.

That said, over the last several months, we’ve seen some some PR-approved Rapha numbers (revenues, etc.) sprinkled throughout multiple reports about the brand. Frankly, those have left us with more questions than answers.

One big question in particular has stayed front and center for us: Why are Rapha’s margins — £1.1M ($1.4M) on £48.8M ($62.1M) revenues for 2015-16 — so meager? Finally, we understand why.

The key numbers that help to explain Rapha’s slim margins:

  • A big hiring spree. Rapha went from less than 50 employees in 2013, to 306 in 2016. Payroll over that period increased from £3.5M to £10.4M. In the tech world that’s not much of an increase. But in the modern luxury space, that is a big jump in employee count. Revenue per employee has remained strong, however: £166K in 2014, £174K in 2015, and £159.5K in 2016.
  • Pre-tax profit margins have never been good for them. They reached their height in 2012 at 5.4%, and touched a low at in 2015 at a paltry 1.31%. For 2016, the pre-tax profit margin was 2.3%.
  • Where most of the margins are gobbled up. Production costs (i.e. supply chain and manufacturing) are a huge drain: They accounted for £25.36M (51%) of revenues in 2016. But outside production costs like payroll and rent on leases for its 14 retail locations (they’ve been ramping up their retail presence in recent years), are also hogging up considerable bandwidth: £22.4M (46%) of turnover for last year.

Other key insights worth noting:

  • There was a decent boost in revenues from 2013 – 2016. Rapha went from £16.9M in 2013 to £48.8M last year. That’s just under 3x growth in four fiscal years. Decent, but not great.

“For a solid brand in the right market segment — like Rapha (a high-end luxury fitness brand) — and given the low profitability, this could be a deal where we see somewhat of an outlier in terms of EBITDA multiple,” he predicted. “Even on a 1x revenue valuation, which Rapha should certainly get barring any skeletons in their closet of which I’m unaware, this could be a transaction well above the more typical 10x-20x EBITDA multiples we are used to seeing for healthy luxury brands.”

Big picture: One subscriber had this to offer about the patterns observed in the numbers dating back to 2013. “It would appear that Rapha has probably been operating in such a way to make the company more attractive for a potential acquisition and or merger. It appears at least initially that they succeeded in [that] respect [given that the deal goes through, of course].”

Still, what’s holding the deal back? And is this the best option for Rapha in terms of buyers? Also worth asking — why exactly are CEO Simon Mottram and the team looking to sell (if they are), and what motives and strategic considerations (beyond the obvious liquidation) are stoking that desire?

Stay with us. We’ll have more on that front in a new report tomorrow. Be sure to subscribe with us in the box at the top of this page to get tomorrow’s report sent straight to your inbox. You can also catch up on our previous Rapha-LVMH coverage here.

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