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.
Here's where Kors is headed and how acquiring Jimmy Choo could be the final nail in the coffin…
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 brick-and-mortar retailer that has 429 stores in the United States and an additional 329 stores internationally, but it competes with other luxury brands that sell their merchandise through its 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 e-commerce 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.
- Customers won't pay full price in Kors stores if they can get Kors merchandise at discounted prices elsewhere.
- 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 labeling is a huge uphill battle.
And Kors' acquisition of Jimmy Choo doesn't give it the boost it needs.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.