Challenging retail times — defined by a marked uptick in bankruptcies, store closures and layoffs — are creating an environment primed for consolidation, experts say.
One of the biggest deals market watchers have been buzzing about is a potential buyout of British luxury footwear and accessories brand Jimmy Choo by U.S.-based Michael Kors Holdings Inc.
Since rumors started swirling in December 2016 that Kate Spade & Co. was making its way to the selling block, Michael Kors and Coach Inc. were both tossed around as potential suitors. Ultimately — as confirmed this month — Coach would win the alleged battle between two strategic players.
But with Kate Spade off the table, speculation is heating up that Michael Kors will move even more aggressively to snap up Jimmy Choo, which Coach is also rumored to be interested in — although a buy is said to be less likely following its Kate Spade purchase.
B. Riley & Co. LLC analyst Jeff Van Sinderen is willing to bet that there is “a fairly high probability that Kors and Jimmy Choo [will come] to a meeting of the minds.”
“Jimmy Choo seems like it would be a good fit for Michael Kors, and after not getting Kate Spade, one would think that a more aggressive tact might be taken [on the part of Kors],” Van Sinderen said. “Of course there are limits on price/multiple paid in this environment, and there is likely to be more than one interested party.”
Coach acquired Kate Spade — which has a market capitalization of $2.37 billion — for $2.4 billion this month in an all-cash deal.
Jimmy Choo, which trades on the London Stock Exchange, has a market cap of 790 million pounds, or $1 billion at the current exchange rate. The brand’s 2016 sales were 364 million pounds, or $471 million, representing year-over-year growth of 14.5 percent.
While there are certainly perks to consolidating in the current climate, some concerns have also been raised about a Kors/Choo merger when it comes to Michael Kors — which has had its own challenges with oversaturation and staying on trend — and its ability to take on a higher-end label such as Jimmy Choo.
That’s precisely why Canaccord Genuity Inc. analyst Camilo Lyon said he doesn’t see the merger happening.
“Michael Kors has a lot on its plate right now — as far as what it has to [address] in its own business,” Lyon said. “I don’t think that it needs the distraction of integrating a business that is truly high-end — such as Jimmy Choo — and is not complementary to its largest business, which is Michael, Michael Kors.”
Regarding product-related concerns, Van Sinderen said that if a Kors/Choo deal were to happen, it would be critical for Kors to retain Choo’s creative team.
“In our view, Michael Kors would need to retain Jimmy Choo talent,” Van Sinderen said. “The Jimmy Choo team needs to handle product. We would have some reservations about the Michael Kors team taking over product, at least in the near term.”
For his part — despite chatter suggesting that a Choo buy is completely off the table for Coach since it bagged Kate Spade — Lyon believes a deal between the two could still be in play.
“Coach — if they wanted to — does have the ability to [buy Jimmy Choo],” Lyon said. “It would be a big undertaking, and they probably wouldn’t do it right away, but they could do it [eventually] if they wanted to.”
Looking ahead, Van Sinderen said retail is likely to see more consolidation as more fashion firms seek out lifelines during turbulent times.
“We continue to believe that during this period of consolidation of all things retail, larger players will enhance their growth by acquiring smaller players,” Van Sinderen noted. “It just makes sense for relatively smaller vertical brands to be folded into the infrastructure of larger companies that can leverage.”