Thinking Big: Lawrence Stroll's Race to the Top
With Silas Chou, Tommy Hilfiger, Michael Kors, and Aston Martin
"A brand with the pedigree and history of Aston Martin needs to be competing at the highest level of motorsport. I think it's the most exciting thing that's happened in recent memory in F1 and it's incredibly exciting for all stakeholders in the sport, especially the fans. I can't think of a better name for an F1 team. The global spotlight of F1 is second to none, and we will leverage this reach to showcase the Aston Martin brand in our key markets." Lawrence Stroll
Let's talk about Lawrence Stroll who has been competing at the highest level of the business world for decades. How did he make a fortune in fashion and become the new Chairman of Aston Martin? By finding the right partners, making big bets on ambitious designers, and relentlessly pushing to grow. He helped build two iconic fashion brands, Tommy Hilfiger and Michael Kors, before focusing on his other passion: luxury sports cars.
Sources: articles (linked) as well as American Dreamer, Tommy Hilfiger’s autobiography.
Friends in Fashion: Silas Chou
Stroll was born as Lawrence Strulovitch in Montreal, Quebec. His father was in the textile business and had acquired the license for Pierre Cardin in Canada (Cardin was one of the first designers to license his brand widely). Stroll joined the business and added the Ralph Lauren children’s wear license for Canada.
When visiting clothing manufacturers in Hong Kong he met Silas Chou. Chou is the third generation scion of a Hong Kong textile family. He took his grandfather’s business, South Ocean Knitters, and built it the world’s largest sweater maker. Today the family business is called Novel Enterprises and South Ocean is part of Cobalt Fashion. He was one of the first to establish a factory in mainland China in 1978. Chou was a contract manufacturer for designer labels and was eager to own equity in brands himself:
“I may be the last generation of the traditional manufacturing family in the Far East. The comparative advantage is gone. Hong Kong is too expensive. That's why I looked to brand names. This is a great business for my children an grandchildren.”
Chou and Stroll became close friends and partners. When Stroll had the opportunity to become the licensee for Ralph Lauren in Europe, Chou joined him as partner.
A big deal: Tommy Hilfiger
Tommy Hilfiger had an early passion for fashion. At 17 he sold bell-bottom jeans from the back of his car. Then he opened his his first clothing store, People’s Place, which he grew to a chain of ten stores before it went bankrupt in 1975.
Hilfiger picked himself back up and in 1984 he found a backer for his own clothing line: Mohan Murjani of an Indian textile family company called Murjani Group (which owned the then popular Gloria Vanderbilt Jeans). In 1987 however, Murjani ran into trouble: he had acquired a license for Coca-Cola clothing which turned into a nightmare when consumers found out the clothing was manufactured in Asia. The Gloria Vanderbilt line was also declining. Murjani struggled to support the Tommy Hilfiger brand.
Buying the license back was not an option for Hilfiger: banks wouldn’t lend him the money. When Murjani wouldn’t pay to procure the upcoming season’s goods, the anxious Hilfiger flew to Hong Kong to convince a manufacturer to provide him the goods on credit.
He met Chou who had shopped for Tommy Hilfiger clothing in Beverly Hills. Hilfiger pitched him on becoming partners and Chou was enthusiastic, under one condition: Hilfiger had to meet Stroll in Paris where he ran Polo Ralph Lauren Europe. After some initial reluctance they hit it off and Stroll visited Hilfiger in New York to see the Hilfiger merchandise at Macy’s and Bloomingdale’s.
“I remember sitting in Lawrence's home in Westmount when he said, “Look, this has to be big or I don't want to be involved.” And I said, “Well, how do we make it big, Lawrence?” So he said, “We build shops in department stores and we build them in the right locations and we put a lot of investment into it and make them happen.” So he went with me to all the major department stores in the world … and walked up to the CEO or chairman and say, “We want that space right off the escalator.” Tommy Hilfiger
Chou and Stroll set up Sportswear Holdings Ltd. and partnered to buy Tommy Hilfiger from Murjani. Rather than license the name, Chou insisted that the company own the right to the name: “For a partnership to be successful we have to be in the same boat and rowing in the same direction. Most license businesses never succeed because the interests in the end are not aligned.” Chou and Stroll ended up owning 70% (split equally between the two), Hilfiger owned 22.5%, and CEO Joel Horowitz 7.5%. It was the start of a partnership that took the Tommy Hilfiger from around $25 million to nearly $2 billion in sales by the year 2000.
Hilfiger described Chou as the “financial strategist,” responsible for utilizing his manufacturing base, turning Tommy Hilfiger’s Hong Kong buying office into a profit center, negotiating with banks, and minimizing tax. As an example of his complex maneuvers: when Chou planned out the expansion into jeans, he first invested in Pepe Jeans in 1992. Then he took it private with his partners. Pepe then became the jeans and women’s wear licensee for Tommy Hilfiger. And in 1998 the partners sold the company to Tommy Hilfiger.
Stroll on the other hand led the marketing and growth strategy, including the expansion in department stores and in Europe. Initially, Hilfiger clothes were in the men’s areas of department stores. Stroll pushed for high-end in-store shops and invested heavily in beautiful presentation to elevate the brand.
“Lawrence Stroll is probably one of the smartest business guys I've ever met … he taught us how to think big.” Tommy Hilfiger
“I really think that my biggest contribution to the company has been to think big. I have always been an advocate of pushing the envelope. We had such an amazing brand in our hands, and from Day One I was positive that it would be a worldwide success.” Lawrence Stroll
The Tommy Hilfiger brand took off as clothing styles became more casual in the 90’s (“the U.S. clothing market was becoming more casual. We were going into the Information Age, and companies like Microsoft wanted everyone to be casual. There was big market demand and we rode the wave well,” said Chou). Sales really took off once hip hop and pop artists adopted the brand. Snoop Dogg famously wore Tommy Hilfiger on SNL in 1994.
The company went public in 1992 and the two partners sold down their stake throughout the 90’s. While the business expanded into jeans and women’s clothing, they could see the rapid growth phase coming to an end.
“When a baby is three years old, you can see if it is smart or not smart, healthy or not healthy. We do not wait until adulthood, because then there is no growth. We sell at puberty, so there is still growth in the market. There is no risk.” Silas Chou
While the European business was still healthy, in the brand had been overextended in US and faced stiff competition from new urban fashion brands like Fubu and Sean Combs. “Now trendier brands dominate urban fashion, while Tommy's clothes fill bargain bins at Bloomingdale's and Macy's.”
Still, the company had reached nearly $2 billion in sales by the year 2000 and after some years of restructuring it was taken private by Apax for $1.6 billion in 2006. In 2010 it was sold to PVH for $3 billion. Stroll and Chou had turned their investment of around $20 million into several hundred million.
A misstep with Asprey & Garrard
Asprey and Garrard are two British fine jewelers with roots dating back to the 18th century. The two houses had been merged in 1998 and were owned by Prince Jefri of Brunei. The companies increasingly catered to ultra high-end customers with the Brunei royal family becoming Asprey’s single largest customer.
“More and more products were developed specifically with Middle Eastern customers in mind — bejeweled, life-sized cheetahs; huge golden candelabra, and even, one time for a private client, life-sized palm trees whose dates were precious gems.” Dissecting Asprey
But the company was losing money and in 2000 Chou and Stroll partnered acquired it for £100 million with plans for a turnaround. They re-separated both brands, brought in new management, and invested in new flagship stores and marketing. Asprey was going to be a broader British luxury lifestyle brand, not just a jeweler. “How foolish is it that there isn’t an Asprey watch? An Asprey pen? An Asprey lighter? We plan to correct that.” Lawrence Stroll.
They brought in other investors including LVMH, Edward Bronfman, and Morgan Stanley. However, the turnaround didn’t materialize. Rents for the new stores were high, and sales disappointed. Stroll commented on the expensive New York flagship store: “New York was a marketing experience, and not necessarily a pleasant one. We opened a store that was larger than the business required. In hindsight, would we do it again? I don’t know.”
In 2006 the company was sold to private equity investors and reportedly the partners lost their entire investment.
An encore with Michael Kors
"Every generation of consumers has a specific taste. In the '80s it was Waspy, which is what Ralph Lauren delivered. Then in the '90s the urban and street look took off, and Tommy Hilfiger owned that. Today the consumer is swinging back. They want smart casual." Silas Chou in 2004
In the late 1970’s Michael Kors dropped out of FIT to work at an upscale boutique across from Bergdorf Goodman. In 1981 his work was discovered by one of Bergdorf’s buyers and he started his own collection. But in the 1990’s his key licensee ran into trouble and Kors was forced to declare bankruptcy. “Because of the loss of licensing income we had no choice but to do this. In the last two years, we lost a good 15 to 20 stores nationwide.”
He got back on his feet, securing an investment from LVMH in 1997 and designing for their label Céline. But he wasn’t happy at LVMH. “If you're a nice kid, no one pays attention to you.” Tommy Hilfiger knew Kors and thought he had great potential. He introduced Kors to Stroll and Chou in 2000 at his house in Mustique.
In 2003 Stroll and Chou bought 85% of Michael Kors from LVMH and other owners at a $100 million valuation (Michael Kors owned the remaining 15%). The pair had found their next adolescent brand and creative visionary who they could take to the next level.
“Designers at forty have energy, but their experience means they have had some financial trouble. At twenty or thirty years old, they may still be dreamers. At forty, they are not dreamers anymore. They are still full of energy, but they are more realistic.” Silas Chou
“It was time for him to become the next great American designer. We wanted to invest in someone who is American, whose style is aspirational and who is seasoned but not too old. With these criteria, there were surprisingly few names to choose from.” Lawrence Stroll
This was at a time when luxury fashion was not doing well: “In the late Nineties, LVMH Moët Hennessy Louis Vuitton, Prada and Gucci Group appeared to be invincible juggernauts able to take little-known brands and make them bigger and better. Now, a chastened Wall Street has turned a cynical eye on acquisitions. The door has been opened for opportunistic buyers such as Lawrence Stroll and Silas Chou — the proud new owners of Michael Kors.” WWD in 2003
Again they brought in an experienced CEO, in this case John Idol who had worked at Ralph Lauren and been CEO at Donna Karan. They introduced a lower priced clothing line and expanded into accessories: perfume, watches, and, importantly, handbags. Kors became a judge on Project Runway in 2004 and became the next great designer. At first they pushed aggressively into department stores. Then the financial crisis hit and opened up an opportunity to open standalone stores as mall space became available cheaply.
“It's a different strategy. When we did Tommy Hilfiger we took a designer to an affordable price point. With Kors we took a designer to accessories. The emphasis is accessories, and the clothes become the accessory to the accessories.” Silas Chou
The company grew rapidly right through the great recession and went public in 2011 at a $3.6 billion valuation.
“The companies we've bought are very young - in their infantile stages - and for the next 10-15 years they will be all about growth. For that reason, too, I think the economy has less effect on us than it would on a mature brand.” Lawrence Stroll
The company’s market cap peaked at nearly $20 billion in 2014, turning Michael Kors into a billionaire. Again the brand lost some of its cachet and had to retrench. Today, the company is called Capri Holdings and has acquired other brands like Jimmy Choo and Versace. Stroll and Chou had sold their stock over time, reportedly realizing more than $3 billion overall on their initial $85 million investment.
A passion for racing
Lawrence Stroll loves race cars. He is a well-known collector of Ferraris and occasionally makes headlines with a purchase. It helps that he owns the Ferrari Quebec dealership. From an interview with Ferrari Magazine: “The more Ferraris of this type, with this racing history, that I can possess, the more my dream will be complete, though I know that in reality it can never be definitively satisfied. It is a little like in work, in the success of a new project and in the consolidation of the one in progress. The processes of realisation are similar, but obviously for me there is a weakness for cars that I cannot allow myself in work.”
He even owns his own racing track: Le Circuit Mont Tremblant in Quebec where he hosts events like the the Ferrari Challenge. His neighbors complain about the noise of races and helicopters. Says Stroll: “I can appreciate that some people are opposed to noise. And I can understand their desire for tranquility, in which case they should not move in next to racetracks, airports or ski hills.”
Challenge of a lifetime: Aston Martin
Since its founding in 1913, Aston Martin (technically now Aston Martin Lagonda or AML) has gone bankrupt seven times. The company went public in 2018 and the stock has been a complete disaster.
Management pursued aggressive production targets for 14,000 cars and opened a second factory to manufacture the new DBX SUV. Inventory levels at the dealers were already high when COVID hit. The highly levered company needed cash and a rescue deal. Who better to take on the challenge of turning around the luxury sports car manufacturer than Lawrence Stroll (with a group of partners in the form of the “Yew Tree” consortium)?
March 30: general meeting to approve the deal. Stroll became Executive Chairman
April 17: Toto Wolff (CEO of Mercedes-AMG Petronas F1 team) bought shares
May 26: Tobias Moers became CEO (previously CEO of Mercedes-AMG)
October 9: Sebastian Vettel joined the new Aston Martin F1 team and bought stock
December: 1:20 reverse split
So the company has a new leadership team and a new playbook. The product line is expanding with the new DBX SUV and upcoming high-end mid-engine cars. The new team is looking to streamline production and leverage the expanded Mercedes partnership. However, the company is still stuck with an inefficient setup of two factories, a highly levered balance sheet, and operating in a highly competitive market that is transitioning to EVs.
New playbook: follow Ferrari…
It’s clear that Stroll has a deep appreciation for the Ferrari brand, business model, and the lasting value it creates for shareholders and car owners/collectors (at this point Ferrari is a cool ~$40 billion market cap company).
“Firstly, Ferrari is a great brand and I believe that they have the correct model for a luxury automotive firm. So, we are not modelling ourselves after Ferrari, we are modelling ourselves on our own business model. However, to be a luxury automotive player, supply and demand is critical and if you look at the history of Aston Martin, in 2018, 2017, there were roughly 4,000 front-engine sports cars true consumer demand. We also plan a lot of emphasis on our SUV programme, which I guess would differ us from Ferrari in that sense. And yes we do intend to have a very strong mid-engine programme and market it off Formula 1. That is a formula that works to build a true automotive luxury firm. But we definitely have our own goals and our own targets.” Lawrence Stroll, 1H2020 call
Expanding the line-up of cars while limiting production to 10,000 cars is one of the key factors of his new strategy. The new line-up will consist of the traditional front-engine sports cars, the recently launched DBX SUV, and new mid-engine cars called Valkyrie, Valhalla, and Vanquish (see the 1H20 deck).
“Everything you see here being made has an order against it. The most important thing in luxury — it doesn’t matter if you are making handbags or automobiles — is you have to align demand with supply. Actually, there always needs to be one less than the demand. It’s creating a pent-up demand to want the product.” Stroll in The Times
“Historically, there has been a clear consumer demand for approximately 4,000 front engine sports cars. Secondly, the SUV has become a substantial category in the automotive today. I feel confident that we could similarly have a market for 4,000 to 5,000 SUVs a year over time.”
The DBX seems to be selling well so far:
“DBX order book, we are sold. We have orders sold out through the first quarter of next year, and we have weekly orders coming in to match our projections for the full year.” Stroll, Q3 call
It’s notable that for other luxury manufacturers the SUVs tended to eventually outsell the sports cars. For example: Lamborghini and Porsche. Even Maserati bets on more SUVs. So perhaps there is room for more than the 4,000-5,000 DBX’s. On the other hand it’s possible that demand for the SUV will cannibalize demand for the sports cars. Also, it’s evident that Aston Martin is the latecomer in a crowded field.
…and add the Formula One
Stroll is of course bullish on Formula One. With Sebastian Vettel he has a high profile driver joining the new Aston Martin team (the other driver being his son Lance).
“My point of view commercially is that Formula One is very sustainable and is a sport that will grow, particularly geographically, and become a lot more important in the US. They [Liberty] are going to add a few more races there. It’s the largest consumer goods market in the world, and it currently has only one race so I think it spells opportunity in every direction.” Times
Stroll believes the team will strengthen Aston Martin’s brand, especially internationally.
“From next year, we'll have our own highly competitive F1 team, a significant global marketing platform with 22 races a year, and we have dealers in 20 of those markets. This gives up a huge opportunity to engage with our customers and partners in each of those markets.” Stroll, 1H20 call
“A brand with the pedigree and history of Aston Martin needs to be competing at the highest level of motorsport. I think it's the most exciting thing that's happened in recent memory in F1 and it's incredibly exciting for all stakeholders in the sport, especially the fans. The global spotlight of F1 is second to none, and we will leverage this reach to showcase the Aston Martin brand in our key markets.” Stroll, April 2020
“There's a lot of room for improvement and this is what we apply as a strategy moving forward with the company… a lot of room for improvements, especially focused on manufacturing and process efficiency. We hope to restructure our business and right-size our business, and we have actually, explored a target picture for our footprint we're looking to do it in what is perhaps a more efficient manner going forward.” CEO Tobias Moers, Q3 call
“A lot of analysts and journalists were misled and have what I call a mad-on hangover about this company because of what the previous management did. They over-promised and under-delivered.” There is, he says, plenty of “low hanging fruit” for Moers to pick — from duplicate factory costs to expensive parts. “They were not lean.” Lawrence Stroll
Moers has a strong track record coming from AMG. “Under his tenure as chief executive, AMG rose from a niche engine tuner to a widely-known sub-brand of Mercedes, with units topping 130,000 last year. It is thought to contribute a fat portion to the annual profits of Daimler, the owner of Mercedes.” FT
It seems reasonable to expect the new team to find some efficiencies in the manufacturing process. However, they are still stuck with two factories that could support the old targeted volume of 14,000 cars. And it doesn’t seem like they’re planning to close the old factory, although they have laid off workers: “If you go back, this should be one site, not two.” But he added that there were no plans to shrink to one site."
So it comes down to leveraging the Mercedes partnership for powertrains, engines, electronics, and eventually EV. The upside is that AML can outsource expensive R&D. The downside is that the cars could over time be perceived as a more expensive, Aston Martin-looking Mercedes cars (I’m confused, apparently “Mercedeses” is not a thing?). Also, it wouldn’t surprise me if Stroll and his team found another creative solution for the two factory issue over time. Something like folding another niche brand into the mix or finding another spot empty spot in the lineup. Maybe for an EV pickup? I kid, I kid.
New strategic plan
All of this leads to Stroll’s new long-term plan (“FY 2024/2025”): sell 10,000 cars to generate £2 billion in revenue and £500 million adjusted EBITDA with £250-300 million in capex.
At £21.00 per share with ~115 million shares outstanding (post reverse split) the company has a market cap of ~£2.4 billion. Add to that ~£650 million of pro forma net debt post refinancing and equity raise (£840mm first lien notes at 10.5% and £259mm second lien notes at 13.5% plus the revolver, and less £500mm pro forma cash). If they achieved the plan, the company would look cheap on EV/EBITDA basis. However, there won’t be much free cash flow until that expensive debt gets refinanced.
Still, Stroll is confident: “Aston’s battered share price — which at 52.8p sits below its recent 62p a share fundraising — will be “£6, £7 or £9 over the next five years”, Stroll proclaims.” This was in November 2020, before the stock started to recover and underwent its 1:20 reverse split. That seems pretty optimistic to me but clearly Stroll has big plans for the company and being the primary backer of the company it’s his job to sell the market on his vision.
Compared with his prior deals, Aston Martin looks like Lawrence Stroll’s greatest challenge yet. As with Asprey & Garrard, Stroll has taken on the turnaround of a long-established brand. The brand is not built on a creative visionary like Tommy Hilfiger or Michael Kors. And Aston Martin can’t leverage Stroll’s strongest partnership, that with Silas Chou. Though unlike Asprey, Aston Martin sits right at the intersection of Stroll’s passions. And Stroll is bringing very real value to the table in the form of the Formula One team.
He also has a highly credible new management team. The partnership with Mercedes alleviates some of the issues of being a subscale manufacturer. But it also represents a critical dependency and could undermine the brand’s uniqueness in the long run. While Aston Martin plans to go electric longer term, competitors will be moving first ("The future of Bentley will be fully electric"). (“We have a full electric car plan,” Stroll says. “[Aston] ultimately ends up at full electric but there’s a whole transition in between about electrification, about hybrid.”)
With Aston Martin belatedly entering the SUV market, 2021 has the potential to be a great year from a marketing perspective, sporting a new Bond movie and the Formula One team. I’m very curious to see what other creative ideas Stroll and his team will come up with. Like in the Formula One, Stroll is once again competing for the championship in a race with little margin for error.
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