Wall Street Correction and Impact on Retail IPOs…
As the stock market opened this morning (1/24), it appeared that the downward trend in pricing was starting to hit correction territory. Market corrections are typically defined as the market losing 10% to 20% of its value during any given time. While corrections signal growing investor pessimism about the market, they aren’t necessarily a bad thing. Bear markets, or bearish periods, don’t necessarily trigger recessions or worse. For example, there have been 27 corrections in the S&P 500 since World War II, with an average decline of 14%. The market has always recovered and returned to new all-time highs—sometimes within just a few months. Crashes (when indices fall 20% or more within a short period of time) tend to be far less common… but uglier and nearly always a driving force in economic downturns and actual recessions.
As of this morning, the S&P had fallen 10% from its record high on January 3rd. It’s enough to have a fair share of economists worried, as well as some legendary investors. Jeremy Grantham, the Chief Investment Strategist of mutual fund GMO, raised concerns last week when he said that the US is experiencing a “super bubble” in stocks, housing and commodities that is on par with conditions prior to the 1929, 2000 and 2008 economic crises.
Incidentally, at any given time you can always find an analyst or prognosticator to find a “sky is falling” quote. Broken clocks are right twice a day and there is a cottage industry of prognosticators out there (often selling books or hawking alternative investment types) that are always ringing the alarm. The difference here is Grantham has a pretty solid track record.
Valuations have been rich. Very rich. The Shiller Cyclically Adjusted Price-to-Earnings (CAPE) Ratio measures a company’s stock price by the average of a company’s earnings for the last ten years, adjusted for inflation. It is a metric reportedly favored by Warren Buffett for determining potential bubbles had reached a near-record high of 40.21 (meaning stocks were being priced at an average of 40x earnings) on January 3rd of this year. The last time it had reached this level was in January 2000, shortly before the tech wreck which would culminate in the brief 2021 recession. At that time, it stood at 43.53. As of this morning, the CAPE stood at 35.63.
None of this, of course, means that a market crash or downturn is imminent. At this point a measured correction would be a very good thing—assuming that is what is happening. Better to let a little air out of the bubble, rather than see it burst.
But this does have implications for the recent trend of retail IPOs. Certainly, a major driving factor behind this have been rich valuations. There are roughly half the number of publicly traded companies in the United States today than there were in 1999. This is one of the driving factors behind 2021’s record-setting pace of 1,058 IPOs during the year as well as the SPAC craze that started in late 2020. A flood of capital looking for investment in a marketplace where pricing was rich. It has meant some very lofty valuations.
For example, eco-friendly footwear and apparel player Allbirds posted revenues of roughly $219 million in 2020. Their IPO on Nasdaq initially sought $15 per share at a valuation of $2.2 billion. But the stock immediately soared to a first-day peak of $26.03 per share (more than a $4 billion valuation). It has since come back to earth at $12.48 per share (this morning) and a total market capitalization of just over $1.8 billion. The freneticism of the stock market aside, Allbirds is a fantastic brand that was priced for growth—indeed, it plans on opening 300 US stores over the next five years. But the rich valuations are why retailers, both traditional brick-and-mortar and digital natives, have been clamoring to launch their own IPOs.
Right now, only the S&P is in correction territory, but you can assume that if the trend continues that the rush to go public will likely slow. If we are entering an even sharper bear market, the trend will likely halt. This could have some major repercussions for the recent trend of activist investors looking to drive eCommerce spin-offs from retail brands. Think about it, most retailers have spent the better part of the last two decades trying to get the balance right between bricks and clicks. Most chains have grappled with reimagining their physical stores, reducing store counts, tweaking site selection criteria all while investing heavily in building out eCommerce infrastructure… all with the common goal of creating seamless interactions with the consumer whether online or in the store. This is what the entire drive towards omnichannel has been for a substantial part of our industry for years. The idea of separating out eCommerce capabilities from their brick-and-mortar parents makes little sense in terms of those strategies (for a great piece on the topic check out this recent editorial from Erin Cabrey of Retail Brew).
But given the state of IPO valuations (until the last few weeks) spinning off eCommerce divisions as IPOs makes perfect sense… from a short-term investment outlook. These new eCommerce IPOs would create immense paper wealth virtually overnight and they could be easily sold off for immense profit to an exuberant marketplace… theoretically.
As for whether it might be a terrible idea to decouple stores from their eCommerce infrastructure in the omnichannel era? Well, that matters little if the investment in the retailer was only a short-term means to an end to begin with. That said, if a market correction has begun, those investors may want to rethink this strategy. They likely have already missed their prime window. And I suspect the retailers targeted by this evolving trend will be all the better for it if they have.
Garrick
