Call Michael Kors the $111 million man.
If all goes according to plan, that’s how much the designer could get as part of an initial public offering unveiled Friday that could value Michael Kors Holdings at $3.63 billion in the first major IPO of an American designer in years. And his partners, Silas Chou and Lawrence Stroll, could earn even more — more than $490 million.
Kors, who saw his budding business sink into bankruptcy in the early Nineties, paved the way for the offering by raising money from private investors this summer and plans to sell up to 48 million shares — 41.7 million initially, and an additional 6.3 million if demand warrants — for between $17 and $19 apiece, according to a filing with the Securities and Exchange Commission. That could raise more than $900 million and would give the business, backed by Chou and Stroll and led by chief executive officer John Idol, a market capitalization larger than Saks Inc. ($1.52 billion), Salvatore Ferragamo ($2.55 billion at current exchange), Guess Inc. ($2.62 billion) and Tod’s SpA ($2.84 billion).
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The firm intends to trade on the New York Stock Exchange under the ticker “KORS” after the offering, which is being underwritten by Morgan Stanley, J.P. Morgan and Goldman, Sachs & Co. and others.
For Kors, his introduction to Wall Street is a moment 30 years in the making. That’s how long it has taken the designer to build his own name into a brand and a business that now spans 74 countries and includes accessories, apparel and footwear, as well as retail, wholesale and licensing operations.
“It’s a marvelously successful company, and I think an IPO will be very successful,” said Laurence Leeds, chairman of Buckingham Capital Management, adding he might invest in the firm. “They’re putting a high valuation on the company and it deserves a high valuation. The company is very well run, is extremely successful, has a splendid track record and excellent management.”
Some already have their piece of the action, having invested in Kors as a private company, and are looking to sell.
Sportswear Holding is controlled by Stroll and Chou and plans to offer up to 25.9 million shares of its stake, possibly raising $492.7 million while retaining ownership of 35.5 percent of the company. The designer plans to sell 5.8 million shares, raising up to $111.1 million, while retaining an 8.1 percent stake.
Marciano Investment Group, controlled by Paul Marciano and Maurice Marciano of Guess Inc., plans to sell 206,294 shares, netting $3.9 million, while holding on to more than 600,000 shares of Kors. Paul Marciano, vice chairman and ceo of Guess, couldn’t be reached for comment.
The filing also details two employment agreements that lock in Kors, as well as Idol — and both are expected to be revised further before the IPO. Kors’ deal was signed in July and stipulates that he will be employed by the firm until his death, he becomes disabled or he is dismissed “for cause.” As part of the agreement, Kors “shall have creative and aesthetic control of the products produced and sold under or bearing the ‘Michael Kors’ and related trademarks, including exclusive control of the design of such products, provided that the exercise of such control must be commercially reasonable.” The designer gets a minimum salary of $2.5 million for life — plus bonus and other perks, such as a car and driver and health club membership.
Idol’s deal, also signed in July, would keep him on as ceo until at least March 31, 2015, and could be renewed annually after that — provided he is not dismissed “for cause.” The filing did not stipulate his compensation package.
Kors famously started his career at Lothar’s on 57th Street, where he designed a collection for the boutique and was discovered while merchandising its windows by Dawn Mello, then at Bergdorf Goodman. Mello encouraged the Fashion Institute of Technology student to put together his own collection, which was subsequently picked up by Bergdorf’s and ultimately provided the starting point for his career.
He staged his first runway show in 1984, and while his fashion star rose rapidly, there was no shortage of ups and downs. Throughout the first two decades, Kors struggled to build his business into significant volume, and several licenses that would support his growth failed to take off at the time.
Kors recalled those years during an interview with WWD at the opening of his Paris store in March: “When we were in Chapter 11 in the early Nineties, I had been at it for over a decade, which I thought was a really long time. Now I’m like, ‘I was a neophyte.’ But at the time, I kept thinking, ‘If something really does happen, will I cease being me? Oh, my God, I’ve worked so hard, and I’ve killed myself, and if this doesn’t work out and we can’t manage to get ourselves out of this situation, will I have any identity as a person? Is all my identity tied up in being Michael Kors?’ I finally realized that if I had to go back to square one, that if I was just honest and authentic, it would work. It’s what works. You have to know yourself.”
Stroll and Chou bought the company in 2003 and helped grow the business, paving the way to this IPO, as they did for Tommy Hilfiger previously that earned the two men — as well as Hilfiger — a fortune. Hilfiger’s company is now owned by PVH Corp.
The filing for an IPO is a singular event in the life of a company, one in which it is forced to reveal its financial secrets and begin to sell its vision to investors at large. Kors takes 124 pages — before voluminous financial statements and addendums — to explain its business and the current state of the fashion industry to Wall Street.
“We offer two primary collections: the Michael Kors luxury collection and the Michael Michael Kors accessible luxury collection,” the filing said. “The Michael Kors collection establishes the aesthetic authority of our entire brand.…In 2004, we saw an opportunity to capitalize on the brand strength of the Michael Kors collection and address the significant demand opportunity in accessible luxury goods, and we introduced the Michael Michael Kors collection, which has a strong focus on accessories, in addition to offering footwear and apparel.…Taken together, our two primary collections target a broad customer base while retaining a premium luxury image.”
The company said its brand awareness has jumped to 71 percent, up from 11 percent when the Michael Michael Kors brand was launched. In turn, the company has seen dramatic growth in its accessories business, which makes up 62.3 percent of its total revenues.
Kors, which has both a well-established business and room left to grow, is one of a small group of designer brands that is seen as ready to take this step. And Wall Street always welcomes a growth story.
The company’s net income shot up 84.7 percent during fiscal 2011, which ended April 2, to $72.5 million from $39.2 million. Revenues jumped 58.1 percent to $803.3 million from $508.1 million — and have increased nearly fourfold from revenues of $210.8 million in fiscal 2007.
Kors has followed in the footsteps of brands such as Ralph Lauren and Armani that have built their businesses with a two-pronged wholesale and retail approach. Wholesale sales made up 51.5 percent of Kors’ total revenues last year through 1,801 department and specialty store customers in North America and 549 stores carrying the brand in the rest of the world. Retail made up 42.8 percent of total revenues and licensing completed the picture with 5.7 percent.
Kors operates in a global luxury goods industry that is predicted to grow to as much as $305.9 billion by 2014 from $230.1 billion in 2010, according to the filing.
The company is gearing up for more dramatic expansion.
In North America, Kors added 70 stores over the last two fiscal years and now has a total of 169 but, longer term, the company sees potentially 400 stores in the market. In Europe and Japan, where Kors has 34 stores, the firm sees the possibility for 100 doors in each market down the line.
Sales at established stores have been picking up steam. The company’s global comparable-store sales rose 6.3 percent in 2009, 19.2 percent in 2010 and 48.2 percent this year. Kors has had positive comps in every quarter over the last five years — a feat made all the more difficult by the raging U.S. financial crisis, stock market declines and recession.
The company will further introduce itself to investors in a road show that commences next week at The Pierre hotel in New York, a source said.
Kors personifies the description “designer celebrity,” becoming a household name as a result of his star turn as a judge on “Project Runway.” The TV stint in turn has helped fuel the growth of his business and coincided with the launch of his lifestyle retail concept in 2006. He has often spoken of his surprise at the breadth of awareness of his name — from teens to seventysomethings.
“It’s really a tribute to the power of media to kind of boost the credibility of Michael Kors and therefore the brand,” said John Howard, ceo of private equity firm Irving Place Capital.
Howard said Kors, Tory Burch and Kate Spade have all hit the same consumer nerve.
“These companies are just hitting something fundamental in people,” Howard said. “It’s a way for them to grab some aspirational glory for a moderate price.”
Stuart Kreisler, director at Jassin Consulting, said Kors still has a lot of potential.
“They have tremendous licensing income from such products as watches, and they’ve just introduced jewelry,” Kreisler said. “This is so good for the industry, and it’s a good influence for people who want to be in the industry. This gives the company a global platform. Michael took an American dream and made it into a global dream.”
The dream, though, comes with some tough realities — as even Ralph Lauren found in the early years after he went public, when his stock price remained relatively flat before beginning to take off in the last few years as his brand expanded aggressively both in the U.S. and abroad.
“It’s really tough for fashion companies to go public because of the vagaries of our business,” said Allen Ellinger, senior managing partner at Marketing Management Group. “I think Wall Street is so demanding and you can’t be right every season.”