Michael Kors’s purchase of Versace: a Pandora’s box

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Michael Kors’s purchase of Versace: a Pandora’s box

Cong Minh Nguyen

22/11/2018

Michael Kors purchased Versace with $2.12 billion on 25/09/2018, including net-debt. The Wall Street Journal regarded the deal as “a rich one”. This premium price is 117 times more than the Italian luxury fashion house’s 2017 profit of only $17.5 million. There are uncertainties about how the two in this ‘abnormal marriage’ assimilate. On the day of announcement, shares of Michael Kors plummeted by nearly a tenth, equating a loss of $1 billion of market caps due to concerns about an over-expensive transaction to buy an underperforming fashion house 1. There are further worries about whether Michael Kors’ finance can handle their ambitious investment in Versace to position it on track. Furthermore, after the publishing of its fiscal second quarter’s result, share of Michael Kors Holdings is lower by 15%, knocking $1.2 billion off its market capitalisation to a new 52-week-low by last Friday, since Michael Kors brand revenue was down 0.8% and same-store sales were down in the low-single digits 2. Therefore, the acquisition of Versace can be a distraction from fixing the main core problem of the brand that certainly increased scepticism of investors.

However, the deal is argued to be strategical. Versace was one of the last few desirable targets for industrial colonisers such as LVMH, Kering or Tapestry. Therefore, the deal secures Versace’s appearance in the profile of Michael Kors Holdings, which is now Capri Holdings, the first US luxury conglomerate, that also includes Jimmy Choo after the $1.2 billion acquisition last year. Combining Versace’s distribution network, Capri Holdings now has a more diversified geographical portfolio by gaining more access to Europe and Asia. By this, there is now a real US-rival in the big league of European conglomerates like Kering or LVMH. Furthermore, with expertise and network in hospitality sector, Versace Palazzo can give Capri valuable access to experiential luxury, which accounts for $455 billion out of $913 billion total value of the luxury industry 3. Capri can then start to leverage strengths and benefit from back-end synergies. In terms of operations, Michael Kors can help reduce Versace’s running costs by simplifying its business model. The task is to integrate Versace’s diffusion line, Versus, with Versace Jeans by utilising Michael Kors’s expertise to revisit the licensing of Versace Jeans, which belongs to Swinger International at the present. One other important short-term consequence is about reputation and digital marketing. The new conglomerate can get immediate access to 14.1 million Instagram followers of Versace, which is the 7th highest among luxury brands, combined with Michael Kors’ competent online and social media marketing strategies to develop e-commerce and omni-channel to widen customer base as well as better shopping experience to boost sales, 58% of which are digitally reliant 3.

The ambition of Capri Holdings is even bigger in the long-run. Versace will surely add its heritage and high-end couture credibility to help the immature conglomerate climb up the market, while Capri Holdings has the financial power to improve Versace’s production and distribution network to boost revenues and
profitability. Clearly, Capri believes in synergies and the combined enterprise value will be significant enough to justify the premium price of $2.12 billion for Versace, implying a considerable revenue multiple of 2.5x. and a whopping EBITDA multiple of 22x 4. The goal is to increase Capri’s revenue in the long run to $8 billion with Versace contributing $2 billion, which doubles its CEO’s prediction of solely $1 billion for 2018. It is a good analogy between Versace and the ‘sleeping princess’ that is waiting for the prince, Michael Kors, to wake her up. To fully utilise Versace’s potentials as the 80s’ heritage, the acquisition paves the way to build on such momentum to double sales by using Michael Kors’s finance to increase Versace’s global footprint to 300 from 200 stores 4. Versace’s focus will also be shifted from clothing to Michael Kor’s sweet spot of more reasonably-priced accessories, meaning an expansion of Versace’s accessories and footwear to enormously 60% of revenues from the current figure of 35% 5. To catch the trend, Versace can then utilise existing technology from Michael Kors to develop its unique line of branded smart watches. Such technological diffusion and further integration of production line will then ensure large economies of scale to make cost-savings in the future. In the long-run, the push further into luxury also serves as a defence for Michael Kors against the next economic downturn. Indeed, while the lowered-priced accessible luxury market represented by the Michael Kors brand has been struggling for years with slowdown in like-for-like sales and intensified discounts of retailers seeking to appeal consumers, the high luxury market offered more “sustainability” since those consumers are
among the most likely to continue their spending during a recession.

Conversely, the main risk comes from such inherent contradictions in the strategy of Capri Holdings. The plan to popularise Versace by sticking its Medusa logo to all types of accessories might imperil the initial purpose of the acquisition to help Michael Kors climb up the market. Indeed, the deal brings more confusion about Michael Kors’ brand positioning. Similarly, the long-term emphasis on boosting sales and revenues with a promise of brand-new duty-free stores in international airports around the world seems to lose Versace’s exclusive aura, which can lead to backlash from Versace’s fans and mixed messages might be sent to customers having observed the closure of 42 Versace stores last year 4.

In conclusion, the short-term consequence of the $2.12bn deal is problematic when investors are losing confidence in Michael Kor’s capabilities to keep pace with Mr Idol’s ambitions and consumers are showing hostilities towards the commercialisation of European heritage as a core value of Versace. There are risks and uncertainties but the answer will lie at how Capri Holdings speeds up its integration process to move up market and catch the fashion trend, which is now being led by the ‘Big Friendly Giant’ LVMH holding its empire of 70 high-profile brands.

 

Bibliography:

[1] Michael Kors Woos Versace in Push for Foothold in High Fashion. [online] WSJ. Available at:
https://www.wsj.com/articles/michael-kors-near-deal-to-buy-versace-for-around-2-35-billion-1537790108 [Accessed 22 Nov. 2018].

[2] Michael Kors plans to boost Versace sales after €1.83bn deal | Financial Times. [online] Available at: https://www.ft.com/content/c3582522-c0b0-11e8-95b1-d36dfef1b89a [Accessed 22
Nov. 2018].

[3] Luxury Market Trends – Digital & Experiential Luxury. [online] Available at:
https://www.bcg.com/industries/consumer-products/luxury.aspx [Accessed 22 Nov.
2018].

[4] Michael Kors. [online] Michael Kors. Available at:
https://s2.q4cdn.com/702269136/files/doc_presentations/2018/09/Michael-Kors-Holdings-Limited-To-Acquire-Versace-For-$2.12-Billion.pdf [Accessed 22 Nov. 2018].

[5] Micheal Kors Stock Falls After an Analyst Warns the Versace Deal May “Prove Costly”. [online] Barrons.com. Available at: https://www.barrons.com/articles/micheal-kors-stock-falls-after-an-analyst-warns-the-versace-deal-may-prove-costly-1542384432?siteid=yhoof2&yptr=yahoo [Accessed 22 Nov. 2018].

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