Deal To Watch: The Next DTC Luxury Brand

Key Stats:

Summary

As of December 5th, 2018 Armadio has raised $4.9K of the current $50K minimum raise

The Armadio team has been selected as a “Deal To Watch” by KingsCrowd. This distinction is reserved for deals selected into the top 10-20% of our deal diligence funnel. If you have questions regarding our deal diligence and selection methodology please reach out to hello@kingscrowd.com.

Problem

Italian leather products are often considered to be among the highest quality products on the market. As opposed to mass produced goods from factories, handcrafted leather is expensive, especially high-quality handmade leather products meant to have a long product life.

Being so expensive, a large proportion of the population is not able to access such luxury items. However, these prices are often artificially inflated. While the aggregate cost of materials, labor, transportation, taxes may total about $100 of total costs per product, a luxury leather bag from a designer brand can cost $900.

Consumers are willing to pay hundreds, thousands, and even tens of thousands for singular bags for a variety of reasons. Branding contributes a significant amount to this willingness to pay.

By consistently delivering high quality products of unique, iconic designs, luxury brands like Gucci, Hermes, and Armani have built up a strong brand and developed a healthy relationship with their customer base. Today, these luxury handbags act as symbols of wealth and fashionability, on display for all passersby to see.

But, there is a segment of the market that just wants high quality leather products, and not the expensive brand that bags from Gucci bring with it.

So, despite luxury leather products bringing value to consumers, an entire segment of consumers is left untapped. Armadio addresses this issue by producing quality leather products at a lower cost.

Solution

Armadio’s business is run on the philosophy that handbags are more than a cash cow for designers to profit. Rather, its philosophy is centered around the skill of its artisans, a celebration of experience with tradition. They achieve this by bringing on Italian artisans as independent contractors. These artisans are highly skilled, capable of making products comparable to a luxury brand’s. In some instances, they even produce for luxury brands already!

Armadio on the other hand, is able to minimize its operating costs by directly contacting manufacturers through two buyers in Italy, and by distributing their product to their end consumers themselves. Consistent with its philosophy, Armadio doesn’t capitalize on their operational efficiencies.

Rather, Armadio passes along its savings to the consumer, pricing their bags at 2.5x – 3x its per unit costs, earning a 60% margin. The average price of their bags is typically around $300, much more realistic and affordable for most people.

Think of this as the MVMT of leather handbags. For those that don’t know MVMT, they create high end, quality watches for a fraction of the cost of high end watch companies. Recently, they sold to a high end watch company, Movado Group for $100M+. We think Armadio is building a similar business model for the handbag space.

General Market

Leather products are an enormous industry. In 2014, the global market value of leather goods was $93.2 Bn dollars, a sum expected to rise to $121.16 Bn by 2021.  

37% of this purchasing power is accounted for by the Americas, representing a developed and mature market for such leather goods. Finished leather products are segmented into 3 distinct categories: consumer goods, commercial goods, and others. Consumer goods (i.e. footwear, jackets, and handbags) are the most significant of this market.

The handbag industry in particular was valued at $80 Bn in 2018, projected to grow at a CAGR of 5%. The US alone made up $13 Bn of that market size, and is expected to contribute up to $15 Bn by 2022.

Also relevant, online purchases composed of 19% of purchases in 2017, but this is expected to grow rapidly, to 27% by 2021 as more millennial shoppers move to shop for handbags online, inline with other fashion categories.  

Evidently, not only are handbag shopping trends favorable for the company, but also, online shopping is becoming an increasingly significant component. There has never been a better time to be a direct to consumer fashion brand.  

Why We Like it

1. Untapped Market Segment: Armadio seeks to create quality products that everyday customers can feasibly use rather than creating esoteric handbags that people can only dream about. They are recognizing the lack of diverse product offerings for an entire segment of the population – middle class individuals who want fashionable leather products without breaking the bank.

2. Their transparency to consumers, their slim profit margins, and their commitment to quality is indicative of a company that prioritizes their customers above their profits – but this authenticity and quality is likely to result in a healthy revenue stream.

3. Even more, their producers are the same as those who are working for Gucci, Prada and Chanel. Essentially, the quality of the products should be comparable to more established luxury brands – the only difference between their products and luxury products is their branding, design, and price tag. This brand in fact speaks to a more wholesome fair trade mindset that so many millennial shoppers have.

4. It’s the reason that M.Gemi which is essentially doing the same thing for italian artisan made shoes has raised over $58M to date to expand its business.

5. Marketing: As mentioned above, Armadio sells its producers as well as its products, sharing their backgrounds and stories. As a result, they bring another dimension to their products that established brands don’t. The artisan appeal is extremely valuable to the brand value proposition.

6. In their first month of incorporation in 2016, the company earned $85K during their Y-Combinator experience, and continued this revenue growth. In fact they grew so fast that they had to stop marketing efforts, instead focusing on rebranding themselves, seeking a model that could work under the stressors inherent from growth. Since, they’ve launched a new visual campaign, and have a new website for users.

7. Their efforts in digital marketing have shown great results: sales have been increasing at a rate of 40% monthly since re-launching. They hope to leverage these experiences and scale it further as they grow.

8. Commitment to Customer Satisfaction: As touched on earlier their most appealing feature is their company’s authenticity. Their products are all made in Italy, and their founders are familiar with the industry.

9. With this background, they are better able to control quality. They also have employees working in Italy, checking up on local manufacturers, meant to enforce quality standards.

10. This commitment to customer satisfaction is a model shown to work. Companies like M. Gemi have been very successful at encouraging new customers to sign on to their products by ensuring a great customer experience.

11. Armadio’s commitment is likely to do the same. A repeat customer is worth significantly more than a single purchase customer, and customer satisfaction is the best way to drive repeat purchases.

The Founding Team

Matteo Mattia Gemignani first founded Armadio in 2016. As a Tuscany native with a family background in the fashion industry, he has a great understanding of the market.

Gemignani has also had experience in running a multinational corporation – he founded a company in Italy that expanded to Europe, South Africa and the United States.

Through his market research, he recognized the inefficiencies in the current model of product distribution, namely that artisans have the skills to make products that people demand, but have no way to distribute their goods.

After his company was acquired, he tested a sample product, which sold out without a marketing effort. Leveraging his experiences, he launched Armadio to address this inefficiency.

Rating

Armadio has shown its ability to deliver products that satisfy a customer need, for a high quality but reasonably priced handbag. Sourcing Italian leather goods directly provides a unique shopping experience that consumers crave more than ever.

 Customers’ have had a favorable reaction to the company so far with over $300K in lifetime sales, a 30% repurchase rate and an expanding product line to meet customer asks.

With market tailwinds supporting the growth of direct to consumer fashion brands and a frothy acquisition market, including deals such as Michael Kors purchase of Jimmy Choo for $1.2 Bn, and Coach’s acquisition of Kate Spade for $2.4B, we like the opportunities for liquidity that could exist if the team executes.  

A company like Armadio, if they can continue to execute like they showed during their Y-Combinator experience could prove exceedingly successful and provide a healthy exit to investors. However, competing with well established brands can be challenging and as we have heard from other founders in the DTC fashion space, it takes 10s of millions in sales to build a scalable and profitable business in the fashion sector.

Since their hot sales streak during Y Combinator sales have slowed as they have focused on repositioning and setting the business up for long term success, but more capital will need to be raised in order to execute.

In this current round, capital raised has been minimal. Management needs to focus on raising significant capital to get this business to scale. Though they have significant capital still on the balance sheet, they will need much more to grow revenues into the 10s of millions as needed.  

We think at the slashed valuation cap of $4M and the signs of product market fit could prove a good value if the team can finish the round strong and raise the $50K required to close the round. If not investor dollars will be returned and no losses to you the investor will be incurred.