Luxury Market Shifts and Opportunities

Where there’s a will, there’s a way.

That’s the message from Prada and Versace to fashion’s dealmaking market. 

Even with a partial truce in U.S. President Donald Trump’s trade war with almost everybody, the battle rages on with China — and both sides have ratcheted tariffs up to levels that promise to cripple trade between the world’s two largest economies. 

Goods from China, which makes 36 percent of the apparel imported to the U.S., are now subject to a new 145 percent tariff at the border, erasing profit margins and threatening much higher prices for consumers. 

The two-sided shock, hitting both supply and demand, has investment bankers and would-be buyers stepping way back to see what happens next, a series of strategic adjustments or a global meltdown. 

Then the market will re-weigh their dealmaking opportunities as the smoke clears. 

But even in a broken acquisition market, some deals will still get done.

Witness Versace.  

Capri Holdings inked a $1.4 billion agreement to sell the Italian luxury brand to Prada, yes. But there was a lot more “need” than “want” in the sale. 

As one fashion dealmaker put it, “They just needed to do something, anything and this was doable.” 

John Idol, Capri chairman and chief executive officer, bought Versace for $2.1 billion at the end of 2018 and routinely touted the brand’s potential to drive sales of “at least $2 billion” over time. But the top line just barely cracked $1 billion last fiscal year.

Capri is selling Versace at a roughly $745 million discount on its own acquisition price — leaving the company deep in the hole as the brand has produced a total of only $323 million in operating income during its six-plus years at the company. 

But the deal was done because it has its benefits for both Capri and Prada. 

Simeon Siegel, an analyst at BMO, said the transaction will allow Capri to pay down some of its $3.1 billion in total debt, flipping the company from one of fashion’s “worst net leverage ratios to one of the best.” 

“Clearly the focus — and questions — will now turn to whether [Capri’s Michael Kors and Jimmy Choo businesses] can be turned, and we understand the skepticism, but we also believe the cash infusion and inflection from net debt to net cash is not yet being reflected in shares and represents a compelling opportunity,” Siegel said.

While shares of Capri shot up in anticipation of the deal, the stock inched up just 0.1 percent to $14.63 on Friday, leaving the company with market capitalization of just $1.7 billion. 

This is really Plan C for Capri. 

Plan A was to take a group of three founder-led luxury brands and drive consistent growth and profit. 

Plan B was to sell the company to Tapestry Inc. for $57 a share, but that was blocked by the U.S. government.

Now Plan C seems to be to sell Versace and, if possible, Jimmy Choo and then rework Michael Kors, either as a standalone public brand or away from the glare of Wall Street as a private company.

It could turn into something of a fire sale. 

Oliver Chen, an analyst at TD Securities, said the Versace deal implies an enterprise value to sales ratio of 1.57 times on the brand — well below the luxury average of three-times. 

“Versace is an iconic lifestyle brand, yet needs more consistency in terms of price points, channel harmonization, and has untapped potential with respect to accessories and men’s,” Chen said. “Prada will likely need to be patient and need to diagnose, develop and execute a refined plan.” 

While there seems to have been some last-minute doubts on the part of Prada and some negotiating on price, it was a deal that ultimately made enough sense to sign on the dotted line. 

And that could be because Versace can help Prada on a few different fronts. 

The deal brings not just another well-known Italian brand to the group, but a network of 227 stores, some of which could be repurposed to expand Prada’s hot Miu Miu business.

“Prada took the risk because they want to solidify their presence as the luxury giant in Italy,” said attorney Clara Feldman, chair of the luxury brands practice at Blank Rome, who works on many real estate transactions. “I think it was a great marriage for the two brands.” 

And despite all the upset in financial markets and worries — even panic in some quarters — about tariffs, Feldman said the market for high-end real estate is still going strong.  

“It’s similar to COVID-19,” she said. “We have to deal with it. We might have some struggles, but my advice is to grab the market, grab the real estate. Start developing the brand and I think you’ll shine in the end. We’re gonna rebound and everyone wants to be in the hot markets — California, New York, Texas. 

“We’re full steam ahead,” Feldman said on Friday. “The CEOs are like, ‘We want this deal. We don’t wanna lose the space because there’s five others in line if we don’t take it.’”

From that perspective, the timing of the crisis might have been just right for Prada’s acquisition of Versace.  

“They got it at a discount, which doesn’t happen in luxury,” Feldman said.

The Bottom Line is a business analysis column written by Evan Clark, deputy managing editor, who has covered the fashion industry since 2000. It appears periodically.