By Kali Hays
with contributions from Mimosa Spencer
 on August 31, 2017
Jimmy ChooAthena Calderone hosts Vogue and Jimmy Choo event, New York, USA - 14 Jul 2017

Michael Kors Holdings Ltd. may have picked up some high-end cachet with an acquisition of Jimmy Choo, but there’s still a ways to go before it becomes a luxury fashion group.

Shares of Michael Kors ticked up just over 1 percent Thursday to $42.53 after its soon-to-be subsidiary Jimmy Choo posted half-year net income of 17.5 million pounds, a 22.4 percent increase over last year, on revenue of 201.6 million pounds, a 16.5 percent increase.

But that boost is primarily due to an increase in sales in Asia, particularly in China, as sales in the Americas fell 2.7 percent and wholesale sales fell 1.6 percent. Michael Kors’ own most recent financials showed an 8.2 percent sales decrease in the Americas, along with a 4.9 percent decline in comparable-store sales and a 23 percent drop in wholesale sales.

Although Kors’ retail sales grew by 10 percent during the quarter, this was mainly due to the opening of 67 stores over the last year.

Kors’ chief executive officer John Idol is positioning the $1.35 billion Choo acquisition as a first step toward becoming a luxury group, and Choo chairman Peter Harf said the merger has both companies on the path of “global leadership in luxury retail.” But there’s some work to be done before that’s a reality.

Manik Aryapadi, a principal with consulting firm A.T. Kearney, said it will take “at least four to five years” for Kors to build up a real luxury reputation in the Americas and for Choo to regain its popularity, and that’s only if the bigger company plays its cards right.

“Over the last several years the immediate tendency for American companies [during acquisitions] is to think about synergies and cost-cutting, so a mind-set change has to happen if luxury is the goal,” Aryapadi said. “[Kors] should be looking at [Choo] as a purely top-line initiative and any synergies and profits should just be icing on the cake.”

He noted that the major luxury conglomerates — LVMH Moët Hennessy Louis Vuitton, Kering and Compagnie Financière Richemont — are all European, and said that, while they all have the benefit from decades of luxury experience, there’s also a difference in mentality toward their brands.

“They have been successful because they allow the creative and brand direction to stay as is, they let them be independent,” Aryapadi said. “You can’t think ‘How do I cut costs?’ in luxury.”

It may be difficult for any public American company to ignore costs as shareholders are constantly wanting not only growth but their earnings to increase, but with Choo’s apparent popularity in Asia, Kors, also expanding in the region, may well be looking at the U.S. as a secondary market.

“I think that’s a fair comment,” Aryapadi said. “Here, the biggest growth is being seen in off price and [growth elsewhere] is in China, Indonesia, that’s where the growth is coming from, so that’s where company dollars are going. It’s no surprise to see investment happening with that in mind.”

David Schick, a luxury analyst and director of research at Consumer Edge Research, took the idea of Choo’s strong performance in Asia as a purely positive play for Kors, noting the differences between the brands could inform one another.

“These brands won’t and indeed shouldn’t have the same strengths and weaknesses,” Schick said. “Each brand can inform the other on best practices including regional knowledge, marketing, real estate, [customer relationship management], sourcing and merchandising.”

As for whether Kors may be looking to lean on Choo’s higher luxury quotient to boost its own over time, Schick admitted Choo “is higher on the luxury spectrum” and alluded to pricing issues with Kors.

“In the end, we believe staying equal to up-market is advisable, most simply because it limits wholesale compromises,” he said.

Kors is aware of its issues with discounts and its strong presence in the off-price channel and rolled out a restructuring plan earlier this year that called for the closure of 125 stores or more, a pullback on wholesale and a bigger focus on high-end fashion with Michael Kors Collection.

But Choo has problems of its own to be dealt with.

“The problem with Jimmy Choo is less overexposure and more about the styling falling a bit out of favor,” Paula Rosenblum, a managing director with retail research firm RSR Research, said.

Shoe sales made up 74 percent of Choo’s revenue for the first half of the year and accessories accounted for the remaining 23 percent.

Rosenblum added that Choo’s problem with designs “is not even close to the same as Michael Kors’ [problems], but in some ways it’s not exactly ‘fixable.’”

A shift in design tactics with the support of a larger company could nevertheless prove successful for Choo and eventually lead to a resurgence in U.S. sales, but “probably for now” Kors will be focusing on Asia, Rosenblum said.

“[Kors] has to grab revenue from Asia, continue evolving and wait for it to come back around in the U.S.,” she added.

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