Michael Kors Holdings Ltd. appears to be taking a major step to becoming a global luxury fashion group with its purported deal to buy Versace for about 2 billion euros. And if Kors follows its usual playbook, the focus in growing the iconic Italian brand will be on accessories.
The deal could close as early as today, sources said.
The Versace family will maintain a role in the company, sources said, although it could not immediately be learned what will be the exact nature of their involvement.
Kors buying Versace confirms a report in WWD Monday that the Italian fashion brand was close to being acquired by the American fashion house, which generated $4.97 billion in revenues last year.
The stock market didn’t react well to reports of an impending deal, with Kors shares closing Monday at $66.71, down 8.23 percent.
Versace is run by Donatella Versace, creative director, and her brother Santo Versace, chairman, who own 20 percent and 30 percent of the firm, respectively. According to sources, the private equity firm Blackstone, which owns 20 percent of Versace, is planning to sell its stake in the deal. The remainder of the company is owned by Allegra Versace Beck, Donatella’s daughter and the niece of the house’s late founder, Gianni Versace, who died in 1997.
Known for its glamorous gowns and bold printed designs, Versace posted revenue of 686 million euros in 2016 and returned to profitability in 2017.
If Kors follows a similar playbook, it is believed the company will want to build up the accessories portion of the Versace brand, similar to what management has done with the Kors brand.
When John D. Idol, along with Silas Chou and Lawrence Stroll, acquired Kors in 2003, they looked to expand the brand, which had a “cult following,” to a global and multinational clientele. In 2004, Kors was a $20 million business and was losing money. Today, Kors has a market cap of $10.04 billion. Stroll and Chou are no longer investors in Kors and aren’t involved in a potential Versace deal.
While Kors had his initial success designing apparel, the new team saw white space in accessible luxury accessories, which became a windfall for the brand. The luxury space was crowded with brands such as Prada and Louis Vuitton, and Kors saw opportunity for a secondary line that could compete with Coach, Kate Spade and Marc Jacobs. Over time, the bulk of Kors’ business was generated by shoes, bags, eyewear and watches. The company went public in 2011, with shares opening at $25, up 25 percent from their $20 offering price, and closed at $24.20. The initial public offering raised $944 million. All of the IPO proceeds went to designer Michael Kors and other selling shareholders, including Chou, Stroll and Idol. At the time, IPO investment adviser Renaissance Capital said it was the largest fashion IPO since the firm started collecting data in 1995.
Several years later, when Kors experienced a slowdown in handbags in the North American market, saturation and overexpansion (eventually closing stores and pulling back on wholesale), Idol set his sights on such areas of growth as e-commerce, men’s, Europe, Asia and watches. He also signaled his desire to become a portfolio of brands.
Last year, Kors acquired Jimmy Choo for $1.2 billion and started prepping it for ambitious growth. At that time, Idol said the plan was to grow Choo’s store base to a range of 200 to 250 doors, up from the roughly 150 locations it had at the time of the acquisition. Much of that expansion would take place in Asia. It also looked to broaden Choo’s accessories offering, expanding beyond smaller evening bags. A third move was to fund the quickly growing men’s business.
At the time, Idol emphasized that Choo “doesn’t need to be reengineered. It’s a company that needs to have additional resources to grow more quickly.” He said, “We are creating a global luxury fashion group. Our focus is on international fashion luxury that are industry leaders.”
While analysts expressed concern that Kors overpaid for Choo, the chief executive officer noted that having the two together under one umbrella helped the firm diversify from a brand and product standpoint, as well as geographically with greater exposure in Asia and Europe.
Last year, when discussing the desire for acquisitions, Idol said Kors produces cash flow of close to $1 billion a year that can help pay down any debt. It also has a $1 billion revolving credit facility, which the ceo pointed to as a potential source of deal capital. “It’s there for us to use so we can make sizable acquisitions even on our existing financing structure, not having to even go to the debt market if we don’t need to,” Idol said.
A Kors deal for Versace will bring to an end what has been feverish pursuit of the brand over the last few months. According to one source, Donatella Versace herself made overtures to potential investors since the spring, rather than pursue a formal process via investment banks.
It is understood that Kering was among the first to submit an offer a few hundred million euros shy of 2 billion euros. Such a big number extinguished interest from most potential strategic buyers, including Tapestry, save for Kors, which pulled out a bigger checkbook and pursued exclusive negotiations in recent weeks, the source said.
In July, Versace identified accessories “as an important opportunity” it is pursuing with a development strategy. In 2017, Versace’s apparel sales decreased 0.4 percent at retail (220.7 million euros) and 10.9 percent at wholesale (112.8 million euros), while accessories grew 3.5 percent at retail (186 million euros) and 9 percent at wholesale (67 million euros). At the end of 2017, Versace had 218 stores, compared with 239 at the end of 2016. Thirteen of them were full price. In June, Versace said it planned to grow the European and American markets to the level of success the brand has achieved in Asia.
Despite the steep drop in Kors’ share price on Monday, analysts reacted positively to the potential Versace acquisition.
Oliver Chen, an equity analyst at Cowen, said Kors has a big opportunity with Versace, although just how good the deal is for the company also depends on how much it ultimately pays for the business.
“Versace has a big handbag opportunity,” Chen said, noting the deal could ultimately be “more meaningful” for Kors than last year’s Choo transaction.
Kors also has expertise across many of the disciplines necessary for luxury brands to thrive today — from wholesale to e-commerce to logistics to creating connect that connects with consumers online.
“They know what they’re doing across categories and they understand what really sells,” Chen said. “It’s a commercial company that understands how to merchandise. And Versace is ready-to-wear, it’s handbags, it’s purses, it’s jewelry, and I think the collection has been not necessarily focused enough. Digital is a big catalyst for the change that you’re seeing because it’s very expensive to invest in your digital flagship” as well as stores and the rest of the business.
“This is going to happen more and more,” the analyst said. “Brands can’t necessarily stand alone.”
In a research note to clients, Chen quoted Gianni Versace from 1994, when the designer described the brand as influenced by “life, music, movie, people, street.” The analyst argued that this puts the brand’s DNA in sync with broader changes in the luxury industry, which is more streetwear influenced by the day.
“New Luxury is about brands becoming ‘community platforms’ which interplay with all walks of life and allow customers to be the best versions of themselves,” Chen said.
Neil Saunders, managing director of GlobalData Retail, in New York, finds Kors’ decision to acquire Versace an interesting move, considering the American firm’s desire to become a luxury goods house. But he said the benefits of a potential deal could take years.
“That Michael Kors should court Versace is no great surprise. The American company has long desired to transform itself into a house of luxury brands, a process it started with last year’s acquisition of Jimmy Choo. Versace comes with a much bigger price tag of $2.35 billion, almost double the $1.2 billion price that Michael Kors paid for Jimmy Choo. However, it would also put a big-hitting brand with true global status into Michael Kors’ stable,” Saunders said.
“Other than the desire to become a bigger conglomerate, the rationale for buying another luxury label is perhaps less sound. In our view, while progress has been made, Michael Kors has not rebuilt its core brand to the same extent as other players like Coach: its offer is still confused and is nowhere near as rounded nor polished as many other luxury players,” he said. “This shows up in the company’s sales figures where growth has been driven by an upswing in U.S. consumer sentiment and spending, rather than because the brand is generating much better traction.”
He said that over the past few quarters, two things have helped push the group onto more solid ground. “The first of these has been the sales contribution from Jimmy Choo, which has flattered sales growth numbers. The second has been a rebuilding of margins which has helped push up profit. In our opinion, these dynamics have given Michael Kors the confidence to look to new corporate deals in order to fuel future growth,” he said. “The choice of Versace is interesting. If the deal goes through it would certainly push the group into the big league in terms of its profile in the luxury space. It also means that the company would be a player in many different categories from fragrance to home to pets, thereby giving the group a true lifestyle position. However, it is also the case that despite its profile, Versace has struggled to grow sales. As such, Michael Kors is not buying a perfectly performing brand, it is buying a brand that needs work and some repositioning.”
He believes that Kors’ past experience with its own brand will help it make the changes that are required, but these shifts will cause short-term disruption, and that the true benefits might take a few years. “We also believe that some of the work required on Versace, which includes toning down some of the brasher elements of the brand [that] are now out of step with the more subtle tone preferred by modern consumers, are precisely the issues with which Michael Kors has struggled and is yet to satisfactorily resolve,” Saunders said.
“Ultimately, we view this deal as an additive one. While it is true that the enlarged group would be able to make savings on central costs, we don’t see the addition of a brand like Versace being about helping to boost the Michael Kors brand, other than perhaps through a more extensive global supply and distribution chain. It is much more a play to give the group a more rounded and defensible proposition that has a number of brands to drive performance across different parts of the market,” he said.