Michael Kors Holdings Ltd. (NYSE:KORS) is buying high-end shoe retailer Jimmy Choo for $1.17 billion.
On the surface, it looks like a smart acquisition to add the high-profile, high-heeled fashion darling to the Kors stable of upscale offerings.
But there’s a lot more to it.
The acquisition is a huge gamble on a new old strategy that Kors initially succeeded in executing… then royally screwed up.
Based on what Kors’ management said about their plans for Jimmy Choo (and their own uphill battle in the retail Ice Age), any wrong moves now could sink Kors stock and any hope of reclaiming the high ground and fat profit margins the brand once commanded.
Kors Just Isn’t the Name It Used to Be
The background on Kors is more important than you may initially think. It’s representative of what’s gone wrong for retailers, especially Kors and its initial upscale brand identification.
Upscale retailers have typically had better profit margins than general-market retailers, and luxury brand retailers have had even better profit margins than that.
Kors started out as an affordable luxury brand, just below the likes of Gucci, Hermès, and Louis Vuitton. But to gain market share and extend the brand, the company brought out more affordable luxury goods and, through its “wholesale” division, sold to department stores.
Kors is a bricks-and-mortar retailer that has 429 stores in the U.S. and an additional 329 stores internationally, but they compete with other luxury brands that sell their merchandise through their Kors stores (companies like LVMH, Hermès, and Kering, which owns Gucci).
In Kors’ effort to expand its name, it went way beyond what its principal luxury competitors were doing. It pushed merchandise and its name through department stores.
That’s become a big problem for Kors.
The retail Ice Age’s most prominent victims are department stores. To compete with ecommerce competitors, they have had to discount merchandise almost across the board. And that includes the Kors merchandise they sell.
Department stores (though they buy Kors merchandise at “wholesale” prices), have to sell all those products against other similar items they are discounting. Otherwise, they’d sell a lot less of them and have to stop ordering from Kors.
There are two big problems for Kors having its products discounted, sometimes deeply, at department stores.
1) Customers won’t pay full price in Kors stores if they can get Kors merchandise at discounted prices elsewhere.
2) The constant discounting and down-market selling of Kors products cheapens the brand.
Kors isn’t the same luxury brand it once was. Coming back from that down-market labelling is a huge uphill battle.
And Kors’ acquisition of Jimmy Choo doesn’t give them the boost they need.
Misguided Management Decisions Could Bring Down Choo, Too
With the Jimmy Choo acquisition, Kors gets Choo’s 150 direct-sale, bricks-and-mortar stores.
They’re not combining Kors and Jimmy Choo merchandise in their stores, they’re keeping Jimmy Choo independent. While there’ll probably be cross-selling campaigns, keeping the brands in separate locations doesn’t do what Kors needs to do, which is to start upscaling itself again.
Jimmy Choo is considered a luxury brand – some of its shoes sell for more than $4,000.
While Kors has announced their closing of 100-125 stores and pulling back what it sells through department stores, they still have the expense of those remaining stores and the Jimmy Choo stores. And, to top it all off, they’ll have less revenue from fewer department store sales.
The effort speaks to Kors new strategy; lifting the brand, raising prices, increasing margins and profits.
Good luck with that.
Jimmy Choos being separate from Kors isn’t going to lift Kors reputation back to luxury levels.
On its own, Kors is having a tougher and tougher time.
In Kors’ fiscal quarter that just ended on April 1st, the company lost $26.8 million.
Luxury handbag sales, Kors’ big product line, are slowing dramatically. Growth momentum peaked in 2012 at a whopping 19%. In 2016, that “growth” slowed to only 2%.
Shoes, on the other hand (or foot), have has remarkably strong sales growth. Over the past decade, they saw annual compounded growth of 9%. But even they are slowing too. According to Exane BNP Paribas, that growth was 5% in 2016.
With all the problems Kors is facing, buying Jimmy Choo makes sense.
What doesn’t make sense is that they’re not combining names and products throughout their collective stores.
If management is worried that Kors brand will bring down the Choo brand, that’s a problem.
Trying to uplift Kors by increasing prices is a tough strategy. If it fails because Kors just isn’t the luxury brand it used to be and it stays middle-market, it can’t command the prices it wants to, can’t make the profits it expects to, and will drag down the Jimmy Choo brand.
Kors stock is in the toilet.
I don’t see any reason to bank on the Jimmy Choo acquisition. Any other acquisitions of a similar size that management says they’re pursuing still won’t warrant an investment in Kors stock.
In fact, we are now looking at buying puts in my exclusive service, Zenith Trading Circle. If I see a trade suitable for Wall Street Insights & Indictments readers, you can be sure that you can find that here in the very near future.
If you are making your own play on this acquisition news, make sure to let me know in the comments. I love hearing how readers are trading this retail Ice Age.