Profit rises and cash generation are what matter for retailers.
I am writing this article two days before the admission date of Boohoo.com to the Alternative Investment Market (AIM).
Assuming that all goes to plan, I will become chairman and Boohoo.com will become a public listed entity only eight years since its formation.
Watching what has happened in the past few weeks with the initial reception to the retail IPOs - some positive, some negative - makes me slightly nervous.
After several years of the retail sector being less than popular on the stock market, we are now back in fashion off the back of a succession of retail IPOs - a refreshing change for our sector.
However, there appears to be a huge disparity in the values being placed on ‘New Retail’ compared with ‘Old Retail’. In addition, some IPOs are not being well received in their first few days of trading. What should we make of all this?
“After several years of the retail sector being less than popular on the stock market, we are now back in fashion”
Of course the companies concerned don’t ask for all this attention. All businesses certainly want to avoid being valued at a discount to the IPO offer price.
Debenhams, unfortunately, often attracts negative sentiment, even today, from the fact that its share price has remained stubbornly below the IPO price set nearly eight years ago.
Trading at a significant premium to the IPO price can also be bad news, especially in the case of Royal Mail, whose previous owners were the UK Government.
So is IPO price-setting an art or a science?
A starting point is obviously the quoted companies that already exist in the retail sector. However, there are currently wide variances in the values being placed on New Retail versus Old Retail.
For quite some time there has been comment around the valuation of Asos, whose shares trade on a multiple of more than 90 times earnings, whereas Marks & Spencer trades on a mere 17 times - more the norm for the sector.
Of course Asos has now been a public company for more than 10 years, growing fast, and has performed strongly over the years - a formidable achievement for a young company in a rapid growth environment.
So Asos’ position might be something to aim for or dream about, but it is not really deserved until a track record of substantial and sustainable growth has been achieved.
The ideal is a modest premium to the IPO price and a share price that increases off the back of improving sales and profit. The multiple of earnings rating should be higher than in Old Retail because the growth prospects are better.
Not all New Retail companies will achieve these stellar ratings and some are not even going to survive. Too many are measuring their success in terms of turnover growth and the amount of investment funds they raise, rather than profit increases and cash generation.
P.S. On March 14 Boohoo.com shares were placed at 50p and ended their first day of trading at 70p - a 40% premium.