Not too long ago, Michael Kors (CPRI -0.47%) was one of the hottest fashion brands in the United States. However, Michael Kors has fallen on hard times recently, as its over-reliance on discounting finally started to hurt its brand image and pricing power. Management hopes that buying the exclusive Jimmy Choo shoe brand will help get the company back on its feet.
In this episode of Industry Focus: Consumer Goods, the team takes a look at Michael Kors' recent woes, along with its strategy to become a multi-brand fashion house, following the lead of Coach (TPR 1.57%). The Jimmy Choo deal has high potential -- but only if Michael Kors can resist the urge to use big discounts to drive short-term sales gains.
A full transcript follows the video.
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This video was recorded on Aug. 1, 2017.
Vincent Shen: I want to start by treading a little bit of familiar ground, if you will allow me. Dylan and Sarah covered this news briefly on the previous show, and I wanted to get your thoughts on the approximately $1.4 billion deal between Michael Kors and Jimmy Choo. Some background, in case any Fools missed this story: This acquisition was announced one week ago. It's an all-cash deal that should close later this year, and it will bring a high-end luxury brand, Jimmy Choo, in-house for Michael Kors, which is more focused on fashion accessories and handbags. What do you think, Adam? This seems to me like the recent acquisitions at rival fashion house Coach are putting some pressure on Michael Kors' management team to pursue a similar strategy.
Adam Levine-Weinberg: Yeah, I think that's definitely true. There's a budding rivalry now in the fashion space, at least in the United States, between Coach and Michael Kors. And I think Michael Kors sees this as an opportunity to bulk up, get itself a really premier brand in shoes. This will have a variety of potential benefits for them. Some of the bigger ones are, they get a great brand in Jimmy Choo that they think has a lot of growth potential. According to their estimates, they think that Jimmy Choo could eventually become a $1 billion sales brand, which would be slightly more than double its sales today. Then, aside from that, they have a lot of diversification benefits, because Jimmy Choo has more than half of its sales outside of the U.S., whereas Michael Kors has the vast majority of its sales domestically. And also, in terms of product lines, as you mentioned, there is some footwear at Michael Kors, but that's really a very small part of their business, where it's Jimmy Choo's main thing. So you're going to see more diversification within Michael Kors' business lines. It's not going to just be handbags as the dominant thing that they live and die by.
I think that definitely is pretty good for Michael Kors. They've certainly had a lot of trouble in the last two to three years. The problem that they've had is specifically that they diluted their brand. They realized they made a mistake. They had too much distribution, too many Michael Kors bags, and they had discount channels and on sale with deep discounts at places like Macy's and even in Michael Kors' own stores. And it's really hard to get out of that trap, and both Coach and Michael Kors have had this problem. They're trying to fix it, but Coach is really ahead right now. Coach has also done more of this diversification work in terms of buying Stuart Weitzman, which is another shoe brand, a couple years back, and buying Kate Spade, which is a rival handbag maker, just recently.
Shen: Yeah. On the diversification front, I think the Jimmy Choo deal should help, Michael Kors, they mentioned, bring their shoe business to about one-fifth of their top line. Then, something they also really touted in some of the press releases and the discussions of the deal is the fact that for especially the luxury women's shoe segment, faster growth than a lot of the businesses that they're currently in. Otherwise, there have been a few indications from Michael Kors CEO John Idol that this is not their first and only deal, it's probably one of many deals to come. He said during a recent conference call, "Let me first start out by saying our primary objective when we're looking for acquisitions was to create a global fashion luxury group," and it definitely brings to mind, for me, the fashion empire conglomerate that you mentioned from Coach, that they're putting together now that they have a distinct handbag-focused brand, they have their apparel, they have a shoe brand as well within their portfolio. So all of this coming together, and it seems like they're both pursuing a similar strategy of diversifying both geographically with their product lines, trying to create more of this empire kind of feel.
Levine-Weinberg: Yeah, that's certainly the way the model is in Europe. You have a few fashion houses, or collections of brands, and it's a company that will own dozens of top fashion brands. You don't really have that in the U.S., and Coach and Michael Kors are starting to go down that road, but in a small way. I think the potential downside of the deal is, if Michael Kors hasn't really learned its lesson from diluting its brand in the last three years, then you could do a lot of damage. They've said that they want growth. They think the women's shoe market is a growth market. But that was also true of handbags five years ago, and they had a lot of growth, but the growth got them addicted to driving sales higher and higher, they got into discounting when people weren't buying the bags at full price. And if you do that with Jimmy Choo, five years down the road, you could be in the same spot where they are right now with their main brand, where people aren't willing to pay that same premium anymore because it's not seen as being something unique, it's not a status symbol anymore. So that's definitely a risk for Michael Kors -- can they definitely keep Jimmy Choo seen as a really premier, luxury, high-end brand?
Shen: Yeah. And if they basically avoid making the same mistakes they made previously.