More Insights Into The Michael Kors—Versace Deal

In late September 2018, Capri Holdings (previously known as Michael Kors Holdings Limited) acquired the iconic Italian Fashion brand Versace, for around $2.12 billion. While many millennials were shocked and expected strong brand dilution in the foreseeable future, the business strategy to diversify the portfolio is no news to the company. Last year, Capri also acquired the luxury footwear brand, Jimmy Choo.

IPO performance and projection?

After the $2.12 billion acquisition, Capri Holdings lost over $1.5 billion in market capitalization and “is down almost 13 percent since then (compared with a drop of around 8 percent in the S&P 500 Consumer Discretionary Index)” (Bloomberg)

Despite the strong criticism of potentially overpaying for the deal, the group’s stock got two upgrades in the past two days (as of November 2nd, 2018). Analysts at UBS Group AG and Piper Jaffray have both suggested the company’s stock is currently “undervalued and under-appreciated” and raised the stock to “buy” from “neutral” with a $80 price target and “buy” from “hold” with $71 price target respectively ($58.8 is the current share price.)

What are the rationales behind these acquisitions?

Acquisitions as such are aimed for portfolio diversification-- which averages out the risk in a large portfolio--  as well as capturing a greater share in the international fashion market. With the rising competition from online retailers, discount outlets, and fast fashion alike, this acquisition can serve as a strategy to win the race in the fashion industry. According to McKinsey, fashion companies with a diverse portfolio created 14 percent more value than companies with a single brand, and companies present in multiple product categories created 33 percent more value than those with single category (McKinsey).

Portfolio diversification through M&A (Merger and Acquisition) transactions can shape people’s perception of a brand. It provides a strong base to strengthen and maintain growth momentum such as brand health, IP (intellectual property), talent, and leading-edge capabilities, which can be realized through carefully assessed M&A transactions.

What next?

Although Capri Holdings currently trades at 11.4 times the estimated earnings, (compared with 19.2 for Ralph Lauren, a company also follows portfolio diversification strategy) and Versace gains only 18% of its revenue in the Americas today, the company has set strategies to hold an optimistic projection.

The company is committed to deploying resources to expand product offerings and investing in information technology systems as well as distribution infrastructures (building omnichannel distribution). The plan is to increase Versace’s retail stores from 200 to 300, expand product offering, and investing in information technology (e-commerce).

It’s also projected that the company’s revenue will be boosted to $8 billion over the long term and that this acquisition will increase the company’s European business by 1% and Asian business by 8% (Zacks Equity Research).

Michael Kors will report earnings on November 7th before the market opens, stay tuned!