LONDON (Reuters Breakingviews) - Is it wise to run in Jimmy Choos? Michael Kors is going to try. The U.S. brand’s $1.2 billion bid for the UK-listed luxury shoemaker will require it to supercharge sales, elevate margins and find synergies. The buyer’s track record shows that is achievable, but at risk of taking the brand downmarket.
Michael Kors is paying 230 pence per share, a 37 percent premium to the closing before Jimmy Choo said it was on the block in April. Including debt, that gives a price of $1.4 billion. The resulting valuation of 15.2 times forward EBITDA is rich for a brand with one of the lowest operating profit margins of European listed luxury shoemakers and slowing like-for-like sales. Kering, owner of red-hot brands like Gucci and Saint Laurent, trades at closer to 14 times.
The idea is to double Jimmy Choo’s sales to $1 billion. If that happens, the deal’s logic just about stands. Assume operating margins of 15 percent – up from their current 10.6 percent level – and use a normal 20 percent tax rate rather than the low 13 percent Jimmy Choo reported last year, and the return on investment would be 9 percent. Cost synergies would help nudge that higher.
Rapid expansion is, at least, what Michael Kors does best. The brand has more than doubled its own sales between its 2013 and 2017 financial years. And its worldwide store count has burgeoned to 827 from around 200 four years ago.
But luxury and breakneck expansion don’t easily mix. Analysts expect the U.S. group’s sales to contract 16 percent in the current financial year, while operating margins are ticking downward in part because of the heavy discounting that has taken hold among American retailers. Michael Kors’ share price has crashed from a peak of $98 in early 2014 to $35 now. Pushed too hard, Jimmy Choo may lose what remains of its luxury poise.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.