By:
Andrea Blomquist AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary:
• Michael Kors Holdings Ltd. (NYSE: KORS) is an affordable-luxury
retailer that provides apparel, handbags, and other accessory products to
retail customers across the globe, primarily located in the United States,
Canada, Europe and Japan. KORS is
headquartered in London, UK.
• KORS’ announced on September
25th, 2018 that they would acquire Versace for an enterprise value
of $2.12 billion and will change its name to Capri Holdings Limited once the
deal goes through.
• KORS has a tough feat
ahead of itself, as it aims to continue its own personal mend while balancing
the challenges of the Versace implementation.
• Management has
indicated that with Versace KORS plans to expand its global reach into Asian
markets such as Korea and Japan, as well as newer parts of Europe.
Key
points:
In July of 2017, KORS announced it would acquire
high-end shoe brand, Jimmy Choo.
Management had made it clear that going forward, they were looking to
expand their business by using both organic and inorganic means. The announcement of the Versace acquisition
was therefore not much of a surprise and left much of the street neutral
towards this news. At the $2.12 billion purchase
price, that’s a hefty price tag of 22x EV/EBITDA, compared to the 17.6x
EV/EBITDA they paid for Jimmy Choo and other precedent transactions, suggesting
an overpayment. Due to management’s
guidance, we can expect EPS dilution in the high single digits through FY1, but
after that the deal is expected to be accretive.
The problem with the timing
and decision of this acquisition is that it seems like KORS may have bit off
more than it can chew. Again, it was
just over a year ago that KORS acquired Jimmy Choo to help them transition from
a dried up affordable-luxury retailer.
With same store sales still negative and rocky margins, maybe KORS has
other things to focus on more important than acquisitions.
Through the Versace
acquisition, KORS aims to expand into the higher-end luxury market as well as
continue to expand its international presence.
Management plans to leverage Versace’s strong reputation and brand
recognition within the industry to drive long-term growth. By increasing stores in the Asian markets
like Korea and Japan, KORS is aiming to corner a larger portion of the world’s fastest
growing markets.
A key move for KORS
through this acquisition is their plan to shift Versace’s revenue stream to
focus on their footwear and accessories segment. Given KORS specialization in shoes,
specifically after their Jimmy Choo acquisition, this could be a key proponent
in revitalizing both KORS and Versace. This
acquisition also presents an opportunity for KORS to capture additional market
share in men’s apparel and accessories. Men’s sales currently account for about half of Versace’s revenue,
significantly more diversified than other industry players.
What
has the stock done lately?
Upon news of the Jimmy
Choo acquisition in July 2017, the market reacted relatively favorably compared
to what we have seen since the Versace announcement. Since Sept 25th, 2018, the day of
the announcement, KORS has declined in value nearly 10%. This is alluding to the market’s belief it
was an overpriced deal. Other volatility
includes a stock pop of around 10% in Nov 2017 related to a positive 2Q earnings
release. If one thing is for sure, there has been no shortage of volatility in
the past few months.
Past
Year Performance:
Over the past year, KORS has increased 31%
in value, with the bulk of that gain occurring Oct-Dec 2017. Since then, KORS performance has been very
volatile, but overall the stock hasn’t seen any lasting price changes. The bulk of the year, KORS has traded within
the $60-$70 range. The stock is
currently trading at $62.46, its lowest point since June.
Source:
FactSet
My
Takeaway:
KORS’ Versace acquisition
is a strong strategic decision as it expands their customer base both
geographically and demographically. If
implemented without error, KORS stands to gain market share in the Asian
markets and in developing European nations.
They also diversify their customer base as Versace pulls them into the
higher-end of the luxury market, and attracts a larger portion of sales from
males. This being said, it’s a great
proposition, but the implementation is up in the air. It’s also clear that KORS overpaid for
Versace, making it that much more crucial that they are able to convert this
pays off in terms of both growth and profit.
Source:
FactSet
