In a tacit admission that it now has to buy growth it can no longer generate on its own, Michael Kors (KORS) announced on Tuesday that it was buying popular upscale shoe brand Jimmy Choo for $1.35 billion.
The news comes less than three months after Coach (COH) announced its $2.4 billion deal to buy Kate Spade, a purchase that closed recently, and shows how urgently companies that rode the big handbag boom of a few years ago need to find new sources of growth.
For Coach, Kate Spade brings in younger shoppers and makes it less reliant on its namesake label, which is finally enjoying a comeback thanks to Coach’s push into fashion and cutting back on cachet-destroying ubiquity. (Sales have been growing modestly for a few quarters now after dramatic, sustained declines a few years ago.)
For Michael Kors, still the top U.S. handbag brand with 24.8% of the market to Coach’s 13.9% (they crossed over in 2013) according to Euromonitor International, the move allows it to make a big push into high end footwear, and become less reliant on its bread-and-butter handbag business. (According to a Jefferies research note, luxury shoe sales globally grew about 11% between 2013 and 2015, compared to 7% for non-shoe items. And in the U.S., handbag sales growth has slowed to a crawl.)
But Kors will have to tread delicately in its new Jimmy Choos. The brand, after meteoric growth following its 2011 IPO, has seen its sales declines worsen of late, hurt by its overly aggressive store opening campaign (doubling the count in just three years), exposure to U.S. department stores and focus on discounting. Last quarter, comparable sales fell 14.1%, in their fourth straight drop.
Investors were skeptical after news of the deal broke: Kors shares fell 4% in morning trading. (They have lost 65% of their value off an all-time high hit in early 2014.
And with reason. To get its money’s worth, Kors will need a big boost from Jimmy Choo and could end up making the same mistakes it made with its own brand.
Kors says it sees the potential for Jimmy Choo, a British brand part of pop culture thanks to TV’s ‘Sex and the City’ and being in the late Princess Diana’s favor, to grow to be a $1 billion a year brand, roughly double what it makes now and plans to help globalize the brand further.
That could mean Kors could be tempted to exhaust the brand and devalue it as it did its namesake brand when it opened stores at countless malls and made growth more important than protecting brand value in part by becoming a fixture in “off-price” discount stores like TJX Cos’ (TJX) Marshalls chain. Kors forgot that the golden rule of maintaining at least a semblance of luxury is to rein in a brand’s ubiquity.
Kors, like Coach before it, is trying to remedy that: earlier this year it said it would close up to 125 of its stores, and it has been refocusing on pricier bags. But Jimmy Choo itself has lost some of its luster because of discounting at American department stores.
So it will take a lot of discipline for Kors not to repeat the mistakes it made only a few years ago if Jimmy Choo is to be the source of new growth it is banking on and not instead end up another once high-end devalued brand.