Coverage: Michael Kors is buying Jimmy Choo for $1.2 billion

Michael Kors Holdings said it had agreed to buy the shoe company Jimmy Choo for about $1.2 billion, the latest push by an American high-end fashion house to find new sources of growth.

Elizabeth Paton and Chad Bray of the New York Times had the news:

Many upscale brands like Michael Kors have faced plummeting sales and tepid profits. Mall traffic in North America has declined sharply, while shoppers who have traditionally been loyal to the so-called middle market have gravitated toward brands at extremes of the style and price spectrum.

The trends have played well for e-commerce giants like Amazon, fast-fashion brands like H&M and Zara, and luxury houses like Gucci. But it has left companies like Michael Kors — once the runaway leader of the “accessible luxury market” — exposed.

Jimmy Choo, which shot to prominence thanks to celebrity patrons like Princess Diana and the “Sex and the City” star Sarah Jessica Parker, could give Michael Kors a new avenue for growth.

“Acquiring Jimmy Choo is the beginning of a strategy that we have for building a luxury group that really is focused on international fashion brands,” John D. Idol, the chairman and chief executive of Michael Kors Holdings, said in an interview.

Lauren Gensler of Forbes reports that Michael Kors has been hurt in recent years by offering discounts:

In an attempt to woo shoppers, Michael Kors has offered heavy discounts, but has ended up giving people reason to pause before paying full price and diminishing the brand’s cachet.

Sales have taken a nosedive, declining 11% in the latest quarter, and investors have wiped away a third of the stock’s value in the last year. Michael Kors is in the process of closing 100 to 125 of its standalone stores, renovating another 100-plus stores and doubling down on more innovative designs. It also said it would rein in its discounting and sell fewer items to department stores, which are prone to marking down items in order to move inventory.

The acquisition will give Michael Kors a new avenue for international growth and a foothold in the luxury shoe market. “We admire the glamorous style and trend-setting nature of Jimmy Choo designs,” said Michael Kors, honorary chairman and chief creative officer, in a statement.

Jimmy Choo was started in 1996 by British Vogue editor Tamara Mellon and designer Jimmy Choo. Its stilettos, which often cost north of $1,000, quickly became a favorite among celebrities like Sarah Jessica Parker and Princess Diana.

Chris Hughes and Shelly Banjo of Bloomberg Gadfly report that Michael Kors paid a steep price:

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.