“Be like Mike” used to be a pitch for Gatorade with Michael Jordan.
Now it’s a mantra in fashion, where anyone with a brand has had their sense of self worth reframed by Michael Kors’ public stock offering.
With an accessories-heavy business model ripe for retail expansion, designer credibility and some big-time name recognition from “Project Runway,” shares of Michael Kors Holdings Ltd. caught fire when they made their Wall Street debut a year ago. The stock has more than doubled to $51.60, placing the value of the company north of $10 billion.
Kors has a price-to-earnings ratio of 41, pricing the company much closer to Prada (with a price-to-earnings ratio of 37.8) than, say, Ralph Lauren Corp. (21.9) or Coach Inc. (16.1).
The key to Kors’ valuations is its healthy margins and its rapid growth rate.
Thing is, luxe or near-luxe brands tend to have good margins and most have relatively small businesses and, therefore, room to grow. This has other brands expecting higher valuations as they sit at the bargaining table or contemplate an initial public offering.
Investor John Howard, chief executive officer of Irving Place Capital, called it the “Michael Kors effect.”
“Everybody just shakes their head at Kors and says, ‘If Michael Kors is worth that, I’m worth this,’” Howard said. “It’s like everybody’s a little crazy. Everybody sees what’s possible in this world when you have a brand and somehow [they] think they have a brand, but there are very few [like] Michael Kors.”
Even so, there are plenty now looking for — if not the Kors treatment — at least a better payday.
If Kors was sold as the next Coach, Tory Burch is seen in the investment community as the next Kors. And there are plenty of suitors lining up to buy a stake and bankers ready to take the company public. For now, the process has been held up by the firm’s legal wrangling with Christopher Burch, the designer’s ex-husband, over his new C. Wonder chain.
Sun Capital Partners-owned Kellwood Co. is said to be considering an IPO for the quickly growing Vince business, which still is seen as a good candidate to expand abroad. There are also a slew of European names mulling the public markets, including Moncler, Pianoforte Holding and Stefano Ricci.
Brunello Cucinelli romanced investors over the course of a year, selling them on his sense of luxury and prospects for his brand. The effort helped the company overcome European economic concerns and led to a successful IPO in April on the Milan Bourse. Shares of Cucinelli have gained more than 35 percent since the offering.
Tumi Holdings Inc. caught the Kors wave and went public in April, raising $338 million and valuing the firm at $1.79 billion. But that valuation has since fallen to $1.48 billion.
The Tumi retreat proves — as if proof were needed — that all IPOs are not equal and many factors determine how a stock performs once a company takes the public plunge.
Some don’t make it past the starting line.
High-end jeweler Graff Diamonds pulled its Hong Kong IPO in May, citing “adverse market conditions.” The brand’s ultra-high-end appeal ran headlong into a slowdown in China’s economy.
The much-anticipated IPO of Facebook Inc. had an epic flop in New York that same month. In one of the most hyped offerings in years, the social network came out of the gate at $42.05 and proceeded to plummet almost immediately, cooling the market for new offerings headed into summer. Shares are still trading below $30, although they’ve been steadily gaining as Facebook’s mobile strategies are inspiring a second look from Wall Street naysayers.
The IPO market has warmed back up some and brands with a growth tack are still seen as hot commodities, but the proposition is somewhat different for department stores.
Hudson’s Bay Co., comprising The Bay and Lord & Taylor, launched on the Toronto Stock Exchange last month but has seen a modest slide in its price.
The next big chain expected to go public is Neiman Marcus Inc. The $4.3 billion company is coming off a strong year and has plans to expand abroad through digital formats to supplement its more mature U.S. presence. For Neiman’s, it will likely be the lure of luxe and strong cash flow that draws investors.
Although there have been some IPO misfires, the Kors offering still shines brightest. If somebody else replicates that success, brands might not just rush into offerings, but stampede.