Did Michael Kors Overpay for Versace?

In this segment from MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss the pros, cons, and possible motivations for the recently announced purchase of privately held luxury fashion purveyor Versace by Michael Kors (NYSE: KORS). The buyer hasn't been in growth mode for several years, focusing on profits over revenue gains. Does this move signal a shift? Is the 2 billion euro price tag a good deal? The guys weigh the future of the brand, and consider whether now is a good time to add shares to your portfolio.

A full transcript follows the video.

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This video was recorded on Sept. 25, 2018.

Chris Hill: Let's get to the first acquisition, though, and that is Michael Kors taking a page out of the Tapestry playbook, buying yet another luxury brand, this time Versace for $2.2 billion. You look at shares of Michael Kors, they're up ever so slightly. Versace was a private business. It looks like, based on the evidence that we have so far, Michael Kors at least is not being viewed as having overpaid for this luxury brand.

Bill Barker: But they were hit yesterday. The stock was down about 10% yesterday when the rumors of this leaked out into the market, and it wasn't confirmed until the end. I think that looking back at Friday's stock price, this is being deemed a mistake or overpaying or something. Of course, Kors had a history of being a rapidly growing company. Between 2011-2015, they moved from $800 million in revenue to $4.3 billion, in five years. Very impressive growth. The stock played along with that. Then the growth stopped for various reasons. They scaled down the store openings and closed some stores. In the last three and a half years, they've more or less been flat, in terms of the top line, as they've tried to improve the bottom line.

It looks like maybe they're getting back into growth mode and need to acquire another brand rather than try to expand Kors beyond the current lines of where it's at.

Hill: If you're a Kors shareholder, you have to feel pretty good, even with the drop. Over the past year, the stock's up about 45%, even with this drop. We've seen over the past decade both Coach -- now Tapestry, but the namesake brand, Coach -- and Michael Kors have periods of growth, have periods where you look at the company and say, "Yeah, they've over expanded. They shouldn't be trying to go down market and discount and really get into outlet malls and that sort of thing." To your point, I think that if you're thinking about the next five years for Michael Kors, the namesake brand itself isn't necessarily going to be the greatest driver.

Barker: No. Maybe they're going to be on the lookout for more brands. They had a very concentrated position, that being the Kors brand. They did an amazing job, in terms of that growth that I referred to. The stock quadrupled from its IPO to 2014, but then it got cut down from $90 to $30. $66 today. It's visited a lot of interesting places over the last 5-7 years. Today, probably closer to rationally valued than a number of those times in the past. As you say, it's had a good year because there was a little bit more stability to the story than seemed to be the case over the last couple of years.

Hill: They've got the namesake brand of Michael Kors. Now they have Versace. They also bought Jimmy Choo. Do you think at some point, they go the route of a rebrand? The same way that Coach looked at their brands and said, "Alright, we need an umbrella brand." At least in the case of Coach, they were getting hit by the namesake brand results. Those were overshadowing Kate Spade and the other things that they had under that brand, Stuart Weitzman, etc.

Barker: I'm going to go out on a limb and say that they will change the name to Capri Holdings.

Hill: Capri Holdings?

Barker: Yeah.

Hill: Why that?

Barker: That's that the announcement.

Hill: Did that just come out?

Barker: Yeah.

Hill: Oh, OK!

Barker: [laughs] I've read one more article, I guess, that included that information. Capri, what do you think? You've gone after a few rebrandings in your day.

Hill: I have, yeah.

Barker: Does this pass the Chris Hill test?

Hill: I mean, let's be clear. In general, it's been a good indicator -- in some ways, it's been a buy signal -- if I attack a rebrand. There have been companies that have rebranded and I've ranted like, "This is a stupid name," or, "This isn't going to work!" And it turns out that was the time to buy. So, let me put it this way: Capri Holdings makes more sense to me then Tronc or Oath.

Barker: Tapestry?

Hill: I'd say it's slightly above Tapestry.

Barker: There's nothing wrong with Capri Holdings.

Hill: No.

Barker: I think that's going to work out fine. As you say, when you do rebrand like that, it communicates to the employees of the acquired brand or future acquired brands that they are not taking a backseat to the name brand. That is, I think, what will mostly be achieved by naming the company something else, rather than keeping the Michael Kors name as the name of the company and the stock. It'll have a new ticker symbol, I'm sure. I would look for additional brands to be acquired.

Bill Barker has no position in any of the stocks mentioned. Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends TPR. The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool has a disclosure policy.