Jimmy Choo Walks All Over Michael Kors
Jimmy Choo Plc is walking over Michael Kors in its $1.4 billion sale to the U.S. luxury house. To justify the price, Michael Kors Holdings Ltd. is going to have to achieve a step-change in the icon shoe brand's financial performance. If that means chasing higher volumes, it risks damaging the cachet of its new addition.
London-based Jimmy Choo put itself up for sale in April after barely three years as a public company. Selling to Kors gives its 68 percent owners, privately-held JAB Investments BV, and their stock market co-investors a very respectable exit. The annualized return since IPO is about 20 percent. The deal was struck at a 37 percent premium to a strong share price.
The all-in price including assumed net debt equates to 1 billion pounds ($1.35 billion), or 15 times prospective Ebitda. That's in line with where luxury powerhouse and Gucci-owner Kering trades, and a premium to LVMH Moet Hennessy SE and Cie Financiere Richemont SA. Ok, those are trading multiples whereas the deal price includes a premium for change of control. Even so, the starting return on invested capital looks to be an inadequate 4 percent.
Doubtless Jimmy Choo might have preferred to find a home in an LVMH or a Richemont. Such an owner might help it regain the luxury prestige it commanded in the early 2000s, thanks in part to it featuring prominently in U.S. television show Sex and The City.
But Kors almost certainly needed a deal more. It is suffering a slowdown, the consequence of a strategy that has prioritized revenue growth even though overexposure is the enemy of luxury. Kors doubled the number of its stores over three years and has counted on ever-deeper discounts to keep its bags and shoes selling. That boosted sales after its 2011 IPO, but growth peaked in 2013 and revenue declined last year.
Kors looks like it wants to give Jimmy Choo similar treatment. Chief among its stated benefits for this deal is the opportunity to double the target's yearly sales to $1 billion. There are to be more Jimmy Choos for men, and more accessories.
In fact, it sounds like it's going to be Jimmy Choos for everyone. There will be plenty to keep renowned designer Sandra Choi busy. The risk for Kors is that it devalues the legacy it has acquired.
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