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Michael Kors: Wall Street’s Newest Player

The newly flush designer rang the opening bell of the New York Stock Exchange Thursday morning.

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“I’m feeling great,” said an exuberant, and newly flush Michael Kors, after ringing the opening bell of the New York Stock Exchange Thursday morning.

This story first appeared in the December 16, 2011 issue of WWD.  Subscribe Today.

Flanked by partners Silas Chou and Lawrence Stroll, chief executive officer John Idol and chief financial officer and chief operating officer Joseph Parsons, Kors stood beaming on the podium, looking at the crowd below. The Michael Kors Holdings Ltd. partners hugged, high-fived each other, and then called up other members of the staff, as well as Kors’ mother, Joan, to the podium to wave to the crowd. After a few minutes, the stock, listed under KORS, shot up to $25, and the day’s trading began. The stock, which traded between $23.51 and $25.23 throughout the day, closed Thursday at $24.20, up from its IPO price of $20. Some 42.3 million shares were traded. Given the more than 190 million shares outstanding, the closing price left Kors with a market capitalization of $3.82 billion.

After the stock was priced, a press-wary Idol whisked Kors and the team away, saying Securities and Exchange Commission rules prevented them from talking.

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It’s been quite a journey for Kors, who started his business 30 years ago. After sinking into bankruptcy in the early Nineties, Kors emerged and sold the business to Chou and Stroll in 2003 for a reported $100 million. The Hong Kong-based company grew rapidly, setting the stage for the IPO by raising money from private investors this summer. The number of shares sold in this week’s offering was 47.2 million, meaning the IPO will raise $944 million. The offering, which was oversubscribed 10 times, was underwritten by Morgan Stanley, J.P. Morgan Chase & Co., Goldman, Sachs & Co. and others.

Kors, 52, joins a handful of American designers, namely Ralph Lauren, Donna Karan, Tommy Hilfiger and Kenneth Cole, all of whom took their companies public over the last two decades and enjoyed handsome payouts. In fact, Kors has already sold about a third of his stock, worth about $117 million. Stroll and Chou sold about $519 million worth of stock combined. This is the second time the owners cashed out some of their holdings in the company. During the summer, the owners sold $500 million worth of shares in a private sale to mutual fund firms such as Fidelity and T. Rowe Price. Through their company, Sportswear Holdings Ltd., Stroll and Chou continue to own roughly 38 percent of Michael Kors, while the designer himself retains a stake of more than 8 percent.

Although the IPO market for fashion companies dried up in recent years, 2011 has proven to be a comeback year: Prada and Salvatore Ferragamo SpA both filed public offerings in Hong Kong and Milan, respectively, while Coach Inc., which is already traded in New York, listed its depository receipts in Hong Kong. Jeweler Chow Tai Fook raised $2 billion in a Hong Kong IPO this month, and Tumi Holdings Inc. filed for an IPO earlier this week. London-based jeweler Graff Diamonds plans to raise as much as $1 billion in a listing next year and Italian designer Bruno Cucinelli is planning to go public as well. Industry observers and investors will be watching to see how Kors performs in the stock market, which has been rocked by U.S. political wrangling, a sluggish economy and the European debt crisis.

As for Kors, the designer has significantly boosted his profile the last few years, thanks in part to his TV exposure as a judge on Lifetime’s “Project Runway,” a role he has had since 2004, that brought him household celebrity. He has also won the Council of Fashion Designers of America Women’s Fashion Designer of the Year (1999), CFDA Men’s Fashion Designer of the Year (2003) and the CFDA Lifetime Achievement Award (2010). In accepting his Lifetime Achievement Award, Kors gave the line of the night. “Fashion,” he said, “is not for sissies.”

While Thursday’s Wall Street appearance was new to Kors, it wasn’t to Chou and Stroll. The duo previously took Tommy Hilfiger’s business public in 1992, earning them, as well as Tommy Hilfiger, a fortune, before eventually selling it to Apax Partners and later PVH Corp. Their company, Sportswear Holdings Ltd., a global private equity firm, has acquired and developed several global lifestyle brands. Sportswear Holdings’ current holdings include interests in Michael Kors, Michael Kors Far East, Tommy Hilfiger Asia, Karl Lagerfeld, Pepe Jeans and Hackett.

A key strategy behind Kors’ rapid growth has been to reposition itself from primarily a wholesale model to that of a retail model, which the stock market tends to reward with higher price multiples. For fiscal 2011, Kors’ total revenues spiked 58.1 percent to $803.3 million, compared with $508.1 million in fiscal 2010. Net income shot up 84.7 percent to $72.5 million in fiscal year 2011 from $39.2 million in fiscal 2010. Retail accounted for 42.8 percent, 36.7 percent and 28.7 percent of its total revenue in fiscal 2011, fiscal 2010 and fiscal 2009, respectively.

Furthermore, in recent years, Kors has shifted its emphasis from apparel toward accessories. According to the prospectus, Kors’ accessories have increased at a 57.6 percent compounded growth rate over the last three years, outperforming industry growth. Net sales of the company’s accessories and related merchandise (including handbags, small leather goods, footwear, watches, jewelry, eyewear and fragrances) in both its retail and wholesale segments accounted for about 62.3 percent of its total revenue in fiscal 2011.

“We anticipate that sales of our accessories and related merchandise will continue to grow and will become an increasingly important driver of global comparable store sales growth,” according to the filing.

Kors operates a two-tier business: Michael Kors luxury collection and Michael Michael Kors, which is an “accessible luxury” collection, and is the engine of the company. The Michael Kors Collection is sold at such stores as Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus and Harrods, while Michael Michael Kors is carried in such stores as Bloomingdale’s, Nordstrom, Harvey Nichols, Macy’s, Isetan and Lane Crawford.

Expanding its retail network is a high priority for the firm. Kors rolled out 40 new stores in North America in fiscal 2011. “We believe that there is significant opportunity to continue expanding our retail store base in North America and to increase our North American retail store base to approximately 400 locations in the long term,” according to the filing. It said Kors seeks to open new stores in predominately high-traffic street and mall locations.

At present, Kors’ retail segment encompasses 169 North American retail units, including concessions, and 34 international stores, including concessions, in Europe and Japan. Although China is a substantial opportunity for most luxury brands, interestingly, the IPO does not include Kors’ Chinese business, which remains controlled by Chou, Stroll and Kors in a separate company called Far East Holdings, which has licensing agreements with Kors that expire March 31, 2041.

Kors’ wholesale business, which accounted for about 51.5 percent of its total revenues, is done through 1,801 department and specialty stores in North America and 549 department store and specialty store doors internationally. According to the prospectus, the company achieved a 33.7 percent year-over-year increase in its North American wholesale sales through the same number of wholesale doors, primarily attributed to an increase in shop-in-shops. The remaining revenue is generated through its licensing segment, which accounted for 5.7 percent of its total revenues. Licensing revenue jumped to $45.5 million in fiscal 2011, from $24.6 million in fiscal 2010. Licensed products range from watches and jewelry with Fossil Partners to the Aramis and Designer Fragrances division of the Estée Lauder Cos. Inc., to eyewear with Marchon Eyewear.

In addition, the company reported a 48.2 percent year-over-year increase in global comparable-store sales.

The Kors executives see continued growth in the luxury goods sector. According to the Altagamma Studies, a report from the Italian luxury goods association, the global luxury goods sector is poised to grow from $230.1 billion in 2010 to between $299.3 billion and $305.9 billion in 2014, representing a 7 percent compound annual growth rate.

Through their efforts in advertising, catalogues, social media and biannual fashion shows, Kors has dramatically increased its brand awareness. Kors’ brand awareness has increased from 11 percent in 2004 to 71 percent in 2011, according to a study commissioned by the company. In fiscal 2011, Kors spent roughly $27.4 million in advertising expenses in North America and internationally. The company gets added exposure from celebrities, such as Angelina Jolie, Heidi Klum, Gwyneth Paltrow and Catherine Zeta-Jones, who have worn Kors’ designs on the red carpet.

The company’s goals are to strengthen its global brand by continuing to open retail stores in high-visibility locations; maintain its strong advertising position in global fashion publications, expand its online advertising exposure and Internet presence, and continue to distribute its store catalogue featuring new collections. Further, Kors plans to continue to hold semiannual runway shows and leverage the designer’s global prestige and popularity through various press activities and personal appearances.

Analysts believe there is still plenty of room for Kors to grow, both domestically and overseas, though sustained rates of growth could be challenging.

Ron Friedman, head of the Retail Practice at Marcum LLP, based in Los Angeles, said, “The next few weeks will tell whether the price will hold or not.” He said it’s a difficult equities market and growth rates will be “very hard to maintain. I don’t think apparel stocks overall do that great at these multiples.”

Friedman believes Kors will expand his European and Asian business, will sign more licensees and will continue to grow, “but I don’t think the shareholders will get the reward they expect. They always try to price it as high as the market will bear. We’re in a recession, and everyone’s skeptical of the stock market. It’s been very lateral for the last couple of months. I think a lot of people are sitting on the sidelines and not investing in the market.”

“Is it a good time to go public? It’s probably as good a time as any in this environment. I think there’ll be some push-back in getting a higher price,” said Friedman. He said stocks such as Google and Apple, and next year, Facebook, explode when they go public. “That doesn’t happen with apparel stocks,” said Friedman. “When an apparel stock gets to be like Apple, then the world is upside down.”

Dana Telsey, ceo and chief research officer of Telsey Advisory Group, said, “We haven’t had an IPO in a while with this momentum,” citing the company’s store, geographic and product growth. “To hear the number of same-store gains is an encouraging sign,” she said. She expressed confidence that the momentum should continue. “It’s still early on in their stage of growth and there’s more ahead of it,” said Telsey.

Faye Landes, managing director of Consumer Edge Research in Stamford, Conn., added, “The brand is very hot. Wall Street craves growth right now, and there are so few growth names. This fits squarely in there.” She said it’s obvious that Silas Chou is clearly very involved, adding, “He’s one of the smartest businessmen I’ve ever met.”

Josef Schuster, ceo and founder of IPOX Schuster, a Chicago-based financial services firm, said he bought stock in the company and will look to buy more.

“There’s demand for strong luxury brands, and the pricing reflects that. We believe it’s still in the early stages. It’s not cheap, but it has potential. Its revenues are steady and solid, and they have a strong management team in place. There may be a takeover story, too, from a company such as LVMH.”

“The market is validating the perception about how strong the brand is,” said Michael Dart, head of private equity and strategy at Kurt Salmon Associates. “The economics and the fundamentals have just been very good for this business. You don’t have any real blip.”

Dart attributed the company’s success to its successful positioning as a lifestyle brand across multiple price points and categories. Now that Kors has successfully sold his story to Wall Street, others might be more likely to give it a shot.

“There’s a window of opportunity that the Michael Kors IPO has created for similar brands,” Dart said. “You’re going to see a number of people seriously determine whether or not they want to be publicly traded companies.”

There aren’t many candidates, but Tory Burch is another name that is frequently mentioned as an IPO candidate.

Janet Kloppenburg, president of JJK Research, said, “I think Michael Kors is a very high-profile brand that’s in the early stage of its proliferation, both domestically and internationally.” She said its signature products, such as its watches and leather goods, are high-margin businesses with a strong following. “As they open new markets, their following will continue to build and grow,” she said.

Paul Altman, managing director of the Sage Group, a Los Angeles investment firm, feels that Kors’ business has shown an impressive financial performance to date. He said it has experienced stellar growth in wholesale and retail, has a very healthy capital structure and gross margins are improving and are “top of class.”

He noted Kors has clear international growth opportunities, since only about 10 percent of wholesale is outside the U.S., and even less of retail. He also noted that there’s a growing sizable royalty revenue stream, which indicated additional reach of the brand. And since it’s not a huge percentage of the total, he’s not concerned about an overreliance on licensing. “This is a business that has carefully managed its image, and has substance behind the public image of its namesake creative leader,” said Altman.

Even Marciano Investment Group, controlled by Paul Marciano and Maurice Marciano, got into the act. It sold 206,294 shares, netting them $4.1 million, while holding onto more than 600,000 shares.

“We invested in the company first because of our friendship with Lawrence Stroll and Silas Chou, and also because we believe in the team and their vision,” said Maurice Marciano. “They still have tremendous growth opportunity ahead of them and we are really happy to share this success with them.”

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