Michael Kors Buys Another Major Fashion Brand
After some industry speculation spread about a potential deal, Versace is going to have a new home.
The American-based luxury accessories brand announced this Tuesday that it is buying the Italian fashion house for $2.1 billion, with the inclusion of the company’s debt. The value of the purchase is 2.5 times Versace’s current profit, but the deal will help give Michael Kors a boost in the worldwide luxury brand industry.
As a part of the deal, Donatella Versace, sister of Gianni Versace, who tragically died in 1997, will stay to help oversee the label after the merger is complete. Donatella, along with her brother Santo and her daughter Allegra, will also continue as shareholders in the company. Also staying on board will be Versace’s current CEO, Johnathan Akeroyd. In accordance with the buyout, Donatella, her brother and daughter will receive 150 million euros (equivalent to about $177 million) worth of shares once the companies unite. Even Blackstone, a private-equity firm that owns 20 percent of Versace, will reap the benefits by cashing out as part of the deal.
Versace is a world-famous brand and household name, having a strong place in popular culture. However, it has had difficulty in building business for quite sometime now on the level of Michael Kors. At one point, Versace had to receive funds from shares public investors had in the company to raise money. The company suffered losses from the late 1990s to 2011. One example happened in 2009, when Versace managed to generate only €270 million ($318 million in U.S. currency) in sales, but lost almost €80 million ($94 million.) To increase revenue, the company sold 20 percent of its stake to Blackstone in 2014. At the time, Versace’s overall value was $1.4 billion, about a third less than what Michael Kors will purchase it for.
Of course, Michael Kors was not the only company hoping to scoop up Versace, which caught the attention of some of the world’s other big-name fashion conglomerates, such as LVMH, Kering, U.S. aspirants PVH Corp. and Tapestry. However, this major deal could inspire these other big-time brands to attempt to make deals with other companies.
With its renowned status in the fashion industry, Versace is a prospect worth taking on, despite having sales amount to less than $1 billion per year, which puts it far behind some of its rivals, including Louis Vuitton and Gucci, to name a few. However, once the deal is finalized, Versace will have the opportunity to expand its merchandise into accessories and handbags, providing it with the potential to grow and bring in more profits.
Michael Kors could use the boost too. Founded in 1981 in Manhattan by Karl Anderson Jr. (later renamed as the iconic Michael Kors after his mother remarried), the leather goods company is now known across the globe and has brought its American style to more than 100 countries. The brand has enjoyed multiple successes over the years, including the First American Original Award from Dupont in 1983, the launch of their KORS Michael Kors range in 1990, the opening of its first retail stories in 2006 and the purchase of Jimmy Choo last year.
It’s important to remember that Versace is not the only luxury brand that Michael Kors has purchased. In fact, in buying the shoe-maker company, it was the American brand’s first outside expansion; it also signaled the company’s move into the higher-end tier of the luxury industry.
Jimmy Choo was bought from its previous owner JAB Holding Co. for $1.2 billion in July of last year. For Michael Kors, it may as well have been a blessing. At that point in time, its sales weren’t as good as they should’ve been due to competition from online shopping as well as discount and fast-fashion stores like Zara, H&M and Forever 21. In May of last year, sales had dropped by 11 percent and the company was also closing 100 of its 125 standalone stores.
Michael Kors has been struggling due to over-expansion of its brand and relying too much on wholesale vendors, who used heavy discounting on Michael Kors merchandise to shift stock, resulting in the brand growing weaker. In order to re-stabilize itself, the company made the choice to move into another big label market, since putting all their eggs in one basket was doing far more harm than good.
When the transaction with Jimmy Choo was completed on November 1, 2017, there were a number of benefits to be expected, some of which included:
• The chance to increase Jimmy Choo’s sales to $1 billion.
• Using the multitude of different products to create a more balanced portfolio for Michael Kors.
• Increasing expansion in the market for luxury accessories; and,
• Promoting exposure in the global markets, especially the ones really taking off in Asian countries.
There were some ups and downs after the Jimmy Choo purchase, but Michael Kors ended up making the right decision. Now the question on everyone’s mind is: what’s Versace going to be like after the merger? Luckily, Michael Kors already has a course of action.
The plan is to increase Versace’s global footprint from 200 to 300 stores, strengthening their e-commerce presence and expanding on their men’s and women’s accessories and footwear. These two categories currently make up 35 percent of the business, but the desired amount is 60 percent. In addition to acquiring Versace, Michael Kors Holdings Limited will also attempt to offset the Michael Kors brand’s sliding sales and will also be closing its retail outlets and reduce their reliance on department stores. Hopefully these changes will do justice the Italian fashion house.
While the purchase of Versace will provide new opportunities for Michael Kors, fans of the Italian fashion house were less than thrilled and took to social media to express their displeasure.
Here is what people on Twitter are saying about the buyout:
— 𝕷’𝖊𝖓𝖋𝖆𝖓𝖙 𝖙𝖚𝖗𝖇𝖚𝖑𝖊𝖓𝖙 (@H0tSauceInMyBag) September 26, 2018
I’m just gonna be that bitch & say it: Michael Kors CEO John Idol is pulling off a killer business deal and the people crying about this Versace situation really just need to be #informed. A thread:
— Madeline (@maddieduchene) September 26, 2018
Regardless of whether the reaction to the buyout is seen as a good idea or taken with offense, it is definitely a game-changer for Michael Kors. Speaking of the many changes about to be made, Michael Kors Limited Holdings Co. is set to change its name to Capri Holdings once the deal closes. Only time will tell if the company will be able to preserve the legendary reputation that Versace has built.