The race is on.
Coach Inc. might have had a jump-start — it bought Stuart Weitzman in 2015 and added Kate Spade & Co. in a $2.4 billion acquisition that closed just two weeks ago — but Michael Kors Holdings Ltd.’s $1.35 billion agreement to buy Jimmy Choo, revealed Tuesday, is putting pressure on its rival in the new push for scale.
The deal shows that Kors is ready to compete — and spend big to do so, having agreed to pay what some saw as a jaw-dropping 17.5-times Choo’s adjusted earnings before interest, taxes, depreciation and amortization, well ahead of the 10.4-times to 15-times multiples seen in recent years, according to EY’s Luxury and Cosmetics Financial Factbook.
Both Kors and Coach are chasing a dream that’s proved elusive for many — building an American powerhouse that, while more focused on “affordable luxury,” is fashioned after European luxury stalwarts LVMH Moët Hennessy Louis Vuitton and Kering.
“We are creating a global luxury fashion group,” John Idol, Kors’ chairman and chief executive officer, declared to WWD. “Our focus is on international fashion luxury brands that are industry leaders.”
Coach ceo Victor Luis sounded a similar note just after inking his deal for Kate Spade, noting, “We will create the first New York-based house of modern luxury lifestyle brands, defined by authentic, distinctive products and fashion innovation.”
The question is: Do these two companies wind up as established powerhouses that nurture brands of decades, a la LVMH and Kering, or do they find that their pursuit of size leaves them vulnerable and wind up more like Kate Spade & Co.’s predecessor, Liz Claiborne Inc., or Weitzman’s one-time home, Jones Apparel Group.
“It’s a high wire act, particularly when you combine companies [that] have different profiles in the market in terms of the customer they attract and the price points and aesthetic that they have,” said Michael Dart, partner in the private equity practice of A.T. Kearney and author of the upcoming book, “Retail’s Seismic Shift” (St. Martin’s Press).
However it turns out for Kors, Coach and the brands they buy, for now having two more companies positioning themselves to be aggressive acquirers in an increasingly global marketplace could change the dynamics of deal-making. And Choo isn’t the only brand to see a sweet valuation. Financial sources said jewelry company Kendra Scott scored an EBITDA multiple of about 15-times when it sold a minority stake to Berkshire Partners, and Balmain’s sale to Qatar-based Mayhoola for Investments was said to have also seen multiples in a similar range. Coach paid just over 9.2-times Kate Spade’s annual adjusted EBITDA for 2016.
Idol defended the multiple on the Choo deal, saying, “You have to look at historical luxury goods purchases, whether by LVMH or Kering or Prada. We’re actually in the middle price range of what a luxury brand has paid. You can’t compare Jimmy Choo to a non-luxury brand purchase.”
According to one financial source, Michael Kors was competing neck-in-neck with Interparfums SA and its Chinese private equity partner Hony Capital, but Team Kors grabbed the prize “because they wanted it more,” the source said.
The final sale price was well ahead of the roughly $932 million people saw as the top valuation for Choo just last week.
Shares of Jimmy Choo surged 17.1 percent on the London Stock Exchange to 2.28 pounds on Tuesday, just under the buyout price of 2.30 pounds. Kors stockholders were more cautious, but after starting off in the red Tuesday, the firm’s shares closed up 0.1 percent to $34.93.
Luca Solca, sector head, luxury goods at Exane BNP Paribas, noted: “Again, Michael Kors follows the path of Coach — and again on steroids. After a meteoric rise and spectacular crash, it is now the time to recycle cash into other brands, with higher residual equity. Again, it is shoes the accessible American brands zero in on. It is fortunate for JAB Luxury [Choo’s current parent] and Jimmy Choo shareholders that such a bidder is there. The decision to put assets for sale looked like a very long shot, but it is seemingly paying off.”
Whether the price on the Choo deal was rich or in the midrange, the deal opens up opportunity for other brands looking to trade and could help rekindle interest in fashion labels, which have been beaten down lately, although the luxe end of the spectrum continues to do relatively well.
Certainly the more deals that get done at strong valuations, the better it will be for future transactions. The market should be tested again shortly by Bally and Belstaff, which JAB put on the market along with Choo as it sought to unwind its investment in luxury in favor of its bets in the coffee space.
Joseph Lamastra, founding managing partner of Sandbridge Capital, which has stakes in Thom Browne, Rossignol, Farfetch and others, said, “Now you have Jimmy Choo going for 17-times; it’s starting to establish, if you have a global luxury brand in this market, that kind of multiple that isn’t impossible to get.”
And more deals are expected as the industry adjusts to realities at the mall and online.
“There’s just going to be consolidation in general because of the challenges in retail — eventually companies are going to start to need to consolidate,” Lamastra said.
As both Kors and Coach look out across the global marketplace, they see opportunity in spite of, or perhaps because of, a tidal wave of change, driven by shifting consumer preferences and e-commerce.
“Once we integrate Jimmy Choo after six to 12 months, we’ll be looking for additional acquisitions as we build a [luxury fashion] group,” Idol said on Tuesday. “It will not have an American-centered focus. We are looking at international brands.”
The ceo noted: “We just bought a company that doesn’t need to be fixed, or a brand that needs to be repositioned. We don’t have to do anything except support the management team.”
That could help Idol and his team move on to other deals more quickly.
“First and foremost, we want companies that have a heritage,” he said. “Kors is a 36-year-old brand, and Choo is 21. Heritage is relevant to luxury businesses. Also a priority is a company that is a trend and style leader. Michael Kors has that voice and authority, and so does Jimmy Choo….Third, we need something that has size and scale. Jimmy Choo is performing at $500 million in annual volume but can grow to $1 billion….We like the valuation we purchased the company for, and whether or not we can replicate that in our next acquisition is fine. But we will not do an acquisition of a business that’s just doing $10 million, $20 million or even $30 million.”
Wall Street was tentative leading up to the Choo deal, with analysts wondering aloud why Kors would focus funds and energy bringing in a new company while its core brand is in turnaround mode.
Idol said: “We have a plan called Runway 2020. We are encouraged by what we see happening with the results to date….We will return to growth next year. I firmly believe the company has a plan and vision for how we will grow. Second, Jimmy Choo became available. We decided before the company became available that we would form a luxury group. Our balance sheet generates $1 billion a year in cash. There are options on how to utilize the capital allocation, whether to buyback shares, make acquisitions or give it back as dividends. As a public company, we have to use it in the most appropriate way and that is always through an acquisition because that adds growth to the company.
“I appreciate that everyone’s got a point of view and an opinion, but we’re running the company, and an acquisition is the best utilization of our capital,” Idol said.
Peter Killian, a principal at consulting firm The Cambridge Group, which helps firms with their growth strategies, said, “There are short-term and long-term challenges for Michael Kors. Should they fix the short-term issues and then go bigger? Fixing the short-term isn’t easy and could be expensive. From a strategic point of view, this deal makes sense. It gives Michael Kors access to a luxury positioning, as it’s [almost] impossible for a brand to move upscale.”
Killian also said the move by companies such as Coach and Kors to build their own global portfolio of brands is in large measure a reaction to Amazon, which has forced firms to think about how to “acquire a critical mass of customers. In the future, the only leverage a company will have in negotiations with Amazon or others is to have a dedicated and incremental group of consumers.”
How long it will take Coach and Kors to grow into their full potential as a house of brands remains to be seen.
“I would suspect that Wall Street is going to want to see them prove that this strategy works,” said Coye Nokes, luxury goods retail specialist and partner at the consulting firm OC&C Strategy. “From what I’ve seen with Coach and Stuart Weitzman, it has gone pretty well. It’s going to be a big adjustment for the Michael Kors team, understanding how to integrate the Jimmy Choo business.”
Nokes said private equity is still very interested in fashion and luxury, “particularly Jimmy Choo, where they have historically done very well in terms of being able to extract value and drive growth and then sell on and exit. The private equity house has to know how to manage a creative, luxury, enduring business.”
The private equity buyer, Nokes added, is always going to think in the medium term — never the long one. “They’re looking at these companies and saying ‘How long is it going to take for me to make money on this? When do I get my return?’ If you’re a strategic buyer, you can get the cost synergies and capture value. You think about whether you can hold it long-term.”
It was long-term thinking that explains, at least partly, the Choo valuation. While many observers believe the price tag is exorbitant, others said there is still much value to be extracted from Choo, despite the fact that Kors will be its fifth owner since 2001, not counting the company’s founder, the shoemaker Jimmy Choo, whose fashion-savvy customers included the late Princess Diana.
In a report last month, Barclays said there is still much room for growth at Choo, which benefits from “an under-penetration globally, with just 150 stores. There is scope, we believe, for at least 250,” Barclays said.
Barclays added that rolling out stores in China “is especially important,” as Choo has “high brand recognition and a good retail performance helped by the capital controls [China] put in last May encouraging spend at home.”
Idol said the Choo team has in place a plan to grow the business to $1 billion, which includes growing its retail presence. The business is about 30 percent wholesale, and the plan is to add 10 doors annually to its store fleet. Much of that growth is expected to be in Asia, where Idol told Wall Street analysts in a Tuesday morning conference call that the brand is still under penetrated.
Once Choo is brought on board, footwear will account for 17 percent of Kors’ overall business, up from 11 percent currently. Each brand will be run independently, with Idol already rejecting the idea of bringing on a Jimmy Choo diffusion line.
But no doubt, the market will be seeing more of Jimmy Choo in the near future — and the ongoing battle between Kors and Coach as they rush to transform themselves into a house of brands. The question they both face is: Who will have the bigger house?