Michael Kors’ Valuation Sets New Fashion Standard

Michael Kors is Wall Street’s golden man.

As the designer and other shareholders of Michael Kors Holdings Ltd. prepare a secondary offering only three months after the firm’s initial public offering, Kors is having an influence far beyond either his designs or his sales volume. The company’s valuation of $8.97 billion has other fashion firms poring over their books to see what they would be worth if they went public or sold out — and designers trying to figure out their personal worth.

But not everyone’s going to get the same premium valuation, according to experts.

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Shares of the Kors company, which went public at $25 a share in December, are up over 72 percent so far this year. Kors himself raised $117 million in the initial offering and stands to gain more in a secondary offering of 25 million shares, which was priced at $47 a share Friday — the stock fell 3.5 percent for the day, sliding into line with the offering price.

That secondary offering, expected to close Wednesday, will raise $1.18 billion for Kors and a handful of shareholders. If the sale goes through as planned, Kors will realize another $139.5 million, while chairman and chief executive officer John Idol will bring in $81.3 million and the Lawrence Stroll and Silas Chou’s Sportswear Holdings take will tally $550.8 million.

After the sale, Sportswear Holdings would still have a 26.1 percent stake in Kors; the designer would own 6.7 percent of the company bearing his name, and Idol would own 3.9 percent — or slightly less if underwriters exercise their option to buy additional shares.

Early investors in the company sold 47.2 million shares in its IPO, raising a total of $944 million for selling shareholders. The secondary offering is larger on a dollar basis because of stock price appreciation.

All of this has been very good for Kors’ wallet. Forbes has the designer on its billionaire watch list and estimated recently that he would have a net worth in the 10-digit range once his company’s stock hits $63.25.

The IPO has put Kors’ company into a new league. Its stock price gives it a total market capitalization of $8.97 billion and a price-to-earnings ratio of 114.6, according to Bloomberg. Many see this as rich for the brand given its sales volume. By comparison, PVH Corp. has a market cap of $6.05 billion and a price-to-earnings ratio of 18.5, while Ralph Lauren Corp. has a market cap of $16.08 billion and a PE ratio of 25.2 and Coach Inc. has a market cap of $22.18 billion with a PE ratio of 24.

Kors’ Wall Street experience has captured the interest of investors and owners alike — and could alter brand valuations up and down the fashion chain.

“It’s really raised the valuation or the perception of what the Kate Spade brand could be worth,” said Corinna Freedman, an analyst at Wedbush Securities Inc. “It’s also very similar to C. Wonder, to Tory Burch. It’s the new bridge. It’s probably why bridge [areas] in department stores have been underperforming, because there are all these younger, hipper interpretations of what that customer is now.”

Freedman noted that Kate Spade, owned by Liz Claiborne Inc., has a very similar merchandising model to Kors with an emphasis on accessories.

“There’s this misconception that Kors is this luxury player, when the handbags start at $300,” the analyst said. “It’s accessible luxury, it’s luxury for that lower-tier customer. It’s great merchandising to sort of skirt the line between luxury and accessible luxury.”

Fashion firms that are considering selling are looking at Kors and asking buyers to pony up more.

“Private companies are encouraged and emboldened, perhaps, by the experience of Kors and others, and so that’s somewhat challenging in terms of valuation metrics,” said Stanley Silverstein, executive vice president of international strategy and business development at The Warnaco Group Inc., which is on the prowl for a big deal.

Douglas Hand, an attorney representing designers at Hand Baldachin & Amburgey, noted that not all of them are ready to get the same type of valuation. “It took [Kors] a long time to get there, and it took that business a long time to get there,” Hand said. “He’s been relevant for three decades. It’s an objective measure, and it’s a high measure, so people will fly to it as justifying a valuation.”

Kors has been such a hit with investors because of its focus on accessories, a higher margin business than apparel, and its growth trend. The company had 231 stores at the end of 2011, up from 156 a year earlier. And for the nine months ended Dec. 31, profits available to shareholders shot up 91 percent to $82.5 million as revenues rose 64 percent to $922.3 million.

The honeymoon with Wall Street has not yet ended, but there are signs that corporate life at Michael Kors has changed forever.

The company recently raised fourth-quarter profit guidance, while revealing that it was having “operational difficulties” as it transitioned to a new distribution facility. Investors focused on the earnings guidance and brushed pass the operational glitch, but the admission was a significant one — if only because it signaled, once and for all, that everything the company does is now open for review.