Treating Shareholders with Contempt: It’s in Fashion at Kenneth Cole, Michael Kors
Stock investors often play sugar daddy to famous fashion designers, and sometimes that’s a lucrative arrangement for everyone involved. But sometimes being a shareholder in a celebrity company feels a lot like being an overly infatuated fan: disdained for the devotion, helpless to earn respect.
Executives at both companies announced end-runs around shareholders recently aimed at enriching themselves but not necessarily their companies’ investors. Kenneth Cole, chairman and chief creative designer, gave his shareholders a low-ball buy-out offer and explained that he isn’t interested in selling his almost-majority stake to a higher bidder. Michael Kors and his team announced an unexpected secondary stock offering when the ink had barely dried on the IPO.
Mr. Cole, the designer, had clearly grown weary of the demands and explanations public accounting requires when things aren’t going well. Shares of Kenneth Cole, the 12-year-old public company, plunged from $26 to below $10 during the recession and never fully recovered. Despite a nice run a couple of years ago, the price dropped about 20% in 2011 and ended the year at $10.28.
In February, he offered to take the company private with a $274 million buyout, which comes to $15 a share. While that might be a decent gain for recent investors – the price jerked around between about $10 and $16 from 2010 to pre-offer 2012 -- it’s a laughably low amount for today’s retail takeover. Bloomberg calculates Mr. Cole’s offer at less than half the median multiple of reported earnings that U.S. apparel companies have previously sold. If the sale goes through at this price, most people who bought Kenneth Cole pre-2009 get screwed.
Normally, the antidote for such injustice is an open invitation for competing bids. But the shareholders’ pathetic predicament here is rather sobering. Mr. Cole controls shares that represent 89% of the voting power. He doesn’t want his namesake run by another company, and his company has far less value without his shiny name and talent behind it. The shareholders can sell to Mr. Cole, or they can try making money with him against his will. With shares trading above $16 now, investors now are betting Mr. Cole will counter his own offer.
For Michael Kors investors, the situation is more embarrassing than painful. Mr. Kors and his executive team got a rare exception to the 180-day post IPO lock-up period so they could exercise their own stock options, essentially to collect more than $1 billion in bonuses early. On March 23, the insiders priced their offering at $47, which was a 3.5% discount to what common shareholders were selling shares for the day before. The market price for shares dropped immediately to rectify the discrepancy.
The Kors insiders have declined to offer any explanation for defying its investors’ reasonable expectation of a finite market, although there may be some good ones. The company gets a pass on this trick solely because the shares are up more than 90% since the December IPO, and projections of another 19% gain are dancing around Wall Street. At the moment, shareholders are just happy to be part of the party.
For investors, there’s no universal meaning to eponymous fashion plays. Shares of Ralph Lauren Corp. (RL) regained recession-era losses in about 18 months and are up about 270% since 2009. Liz Claiborne (LIZ) still trades at 2008 levels, but they’re up more than 135% on the year. Vera Bradley (VRA) trades modestly higher than its first trading day closing price in 2010. It’s just helpful to keep in mind that what’s good for the hip and famous isn’t necessarily what’s good for their investors. Sometimes you’re better off as a fan.