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Why I Think Its Latest Acquisition Was A Very Good Move For This Retail Stock

Why I Think Its Latest Acquisition Was A Very Good Move For This Retail Stock

This fashion conglomerate is going all-in on the luxury market.

Michael Kors (NYSE: KORS) made a big announcement this week. 

The American contemporary brand has bought European luxury house Versace in a $2 billion deal.

The conglomerate will be renamed Capri Holdings with the ticker CPRI when the deal closes. The new name is inspired by the “iconic, glamorous and luxury destination” island, according to the company. The Michael Kors brand name will be retained.

The deal comes a year after Michael Kors acquired luxury shoemaker Jimmy Choo, signaling the company is going all in on the luxury market putting itself up against the likes of LVMH (OTC: LVMHF), Kering Group (OTC: PPRUF), and Hermes (OTC: HESAF).

In fact, this deal marks the first time an American company has cracked into the super high-end luxury fashion market which has historically been reserved for the likes of LVMH—which owns 70 top-tier luxury brands including Louis Vuitton, Dior, Givenchy, and cosmetics powerhouse, Sephora—and Kering, owner of Gucci, YSL, Balenciaga, and Boucheron.

Kors plans to grow the Versace brand to $2 billion in annual revenue with 300 stores worldwide, up from 200 stores, and increased e-commerce development. It also plans to expand footwear and accessories to 60% of revenue, up from 35%.

“This brand fits perfectly into our group’s strategy to focus on international fashion luxury brands that are leaders in style and trend,” said CEO John Idol on a call regarding the acquisition.

“We are excited to have Versace as part of our family of luxury brands, and we are committed to investing in its growth. With the full resources of our group, we believe that Versace will grow to over $2 billion in revenues,” Idol said.

Investors didn’t react so positively to reports of the Versace acquisition with shares dropping as much as 10% on the news, though Citi analyst Paul Lejuez called it an “overreaction.”

Versace has shown unstable performance in the last few years as the company was profitable in 2015, saw an increase in annual revenues of 3.7% in 2016 but also posted a loss of 7.4 million euros that year, and last year, the company returned to profitability with revenue of 686 million euros.

Thus, Kors isn’t buying a “perfectly performing brand” according to Neil Saunders, the managing director of GlobalData Retail. Saunders added that Versace “needs work and some repositioning.”

If Kors is successful in reshaping Versace into a consistently profitable brand, the conglomerate could prove to be a powerful player in the sector.

Just two years ago, Michael Kors was waging a war on discounting by pulling back on inventory to department stores that inevitably ended up on the sale racks in an effort to boost its brand image. With Versace and Jimmy Choo under its umbrella, Kors has moved beyond the “affordable luxury” space it has inhabited for years and into the high-end luxury market. A move that should help the company better weather the next recession.

Why? Because the woman who will buy a Versace dress now is very likely to continue buying during a recession when shoppers who spend at more affordable brands retreat.

“Where Michael Kors has traditionally sat has been hit harder than true luxury [in recessions], so diversifying across traditional luxury may give them some insulation,” said Kathy Gersch, management firm Kotter’s executive vice president of strategy and change.

This defensive positioning in the global luxury market is a smart move, and with both Versace and Jimmy Choo, Michael Kors will certainly elevate its brand reputation among luxury shoppers. And with the stock now trading at a discount compared to before the Versace announcement, now may prove to be a good time to buy.

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