When luxury retailer Michael Kors listed on the New York Stock Exchange in December 2011, the debut share price was a beefier than expected US$20. Fast forward a little over two years and it is on the verge of hitting US$100. Not a bad return for those who bought early. But then, who would bet against the share price continuing to soar over the next two years? The company seems to have an unflappable knack of getting its growth strategy exactly right, and at a time when rivals are getting it wrong. Now, here is a question to get investors’ pulses racing. Who will be the next Michael Kors?
A Class Apart
There is no stopping Michael Kors. In the last quarter, the company’s sales in Europe were up by a jaw-dropping 144%. This is where the brand has muscled in on a growing appetite for affordable luxury, exploiting a gap in the market left by European players either too busy building stronger positions in China or too preoccupied with taking their portfolios upmarket. And the brand’s runaway success does not stop there. In the US, like-for-like sales were up 51% for the same quarter, fuelled by buoyant demand for luxury accessories and timepieces.
Such results would be impressive in boom times, but keep in mind that the final quarter of last year was a period when many high-profile luxury retailers struggled. Coach, a US rival in affordable luxury, reported a sales decline of 6%, for example, blaming weak demand for women’s handbags and accessories. UK luxury retailer Mulberry – not so long ago a stock market star itself - issued a profit warning in January on the back of a 3% slide in sales for the 17 weeks to 25 January. LVMH, Tod’s and Prada also reported disappointing end of year results. So, how is it that Michael Kors is succeeding where others are failing?
Getting the Timing Right
However good a growth strategy is, a bit of luck – or good timing - can go a long way. Michael Kors ratcheted up investment in Europe precisely when European rivals were taking their eye off local markets, and hiking prices too. Kors was also a relatively unknown luxury brand in Europe – and that newness fuelled cachet. Meanwhile, in his home market of the US, Michael Kors – the designer - had become a popular face on mainstream television thanks to a high-profile role on hit reality show Project Runway. His likeability was a big spur to the brand.
These things might have counted for nothing if middle-class confidence had not been so shaky, however. On both sides of the Atlantic, there was pent-up middle-class demand for luxury goods that fused affordability with desirability. The Kors brand met both criteria and was in the right place at the right time.
US rivals such as Coach and Ralph Lauren began to look tired by comparison, and Kors gobbled up big chunks of their market share. It helped too that both Kors the brand and Kors the designer engaged cleverly with social media platforms, especially Facebook, Twitter and YouTube. On Facebook, Kors now has almost 11 million fans, more than double the number of Coach and around 50% more than Ralph Lauren.
Kors’ formidable revenue growth cannot last forever, though. Or, can it? The problem with fashion-driven growth, after all, is that brands can drop out of fashion as fast as they come into it. The feeling among investors is that the Kors growth engine is a long way from running out of steam. Where the brand seems to have an edge over its rivals is in the speed with which new and innovative products – especially accessories - are rolled out – both through own stores and mixed retailers. This is key to keeping fans of the brand engaged.
The Next Michael Kors?
The big question, from an investment perspective, is how to spot the next Michael Kors. The best probable answer is to start by looking at brands that have Kors hallmarks – not so much in terms of design or portfolio, but in business acumen and growth strategy.
The one to watch is Tory Burch. Indeed, there is mounting speculation that Tory Burch will file for an IPO this year – and, if that happens, there will probably be a luxury goods investment frenzy of the like not seen since Michael Kors listed two years ago. The company is reckoned to be worth in excess of US$3 billion.
Tory Burch has similar cachet credentials to Michael Kors – even if the brand itself is a bit more ‘preppy’. Tory Burch has signed some savvy co-branding deals to boot – for example with watchmaker Fossil and eyewear brand Luxottica.
Launched in 2004, there are now around 100 Tory Burch stores around the world, and there is a momentum to the brand that has a Michael Kors feel to it. A quick glance at the Tory Burch Facebook page shows a little less than one million fans – quite a big following, but bucket loads of room for growth. Fast growing stock in the making? Watch this space.