By Gayathree Ganesan and Siddharth Cavale
(Reuters) - U.S. retailer Michael Kors (N:KORS) is betting that its acquisition of storied shoemaker Jimmy Choo will give sales a much-needed boost, but lingering problems at Kors' core bag business could delay potential benefits.
Kors said earlier this week it would buy Jimmy Choo for $1.2 billion and plans to expand the line by opening more stores, especially in Asia.
Jimmy Choo, whose towering stilettos were made famous by characters in the popular TV series "Sex and the City," is synonymous with affluence, and somewhat at odds with Kors' image of accessible luxury.
It could be argued that Jimmy Choo will give Kors's tumbling sales and stock a leg up, but experts said Kors' expansion plans could dilute the shoemaker's brandname.
"Revenue expansion doesn't come from opening stores today, but figuring out how to unlock the e-commerce component and (Kors) haven't proven that they get that either," said Eric Schiffer, CEO of private equity firm Patriarch Organization.
Kors has made this mistake before.
Once a seller of popular Mercer and Hamilton handbags, Kors put its wares too quickly on too many shelves, making them ubiquitous.
Since then, the company has struggled to come up with designs that have caught the fancy of the well-heeled buyer, who have gravitated toward bags offered by Coach Inc (N:COH) and Tory Burch.
Kors' has been trying to stem the sales declines by expanding into dresses, menswear and online, but has had little success.
"If (Kors) had fixed their U.S. market, if they'd shown improvements there and then made this acquisition, people would be a lot more comfortable with it," said Gabriella Santaniello, analyst at A-Line partners.
"For (Jimmy Choo), I could see them opening in another market but I think that is what makes everyone nervous. It is like: "Look what they did with the Michael Kors brand, are they going to do that to Jimmy Choo?"
MULTIBRAND STRATEGY
Kors' rival Coach Inc (N:COH) faced similar problems not so long ago.
But Coach responded quickly, by tightening supplies to department stores to regain its luxury cachet, before diversifying with the buyout of upscale shoemaker Stuart Weitzman in 2015.
The company recently bought smaller rival Kate Spade, whose products are a hit with millennials.
Both retailers seem to be looking to emulate the successful multibrand strategy employed by European companies LVMH (PA:LVMH) and Kering SA (PA:PRTP), where cash flows from one large brand are reinvested into smaller but faster growing ones.
These two companies have grown into luxury powerhouses by buying multiple luxury brands such as Christian Dior, Tag Heuer, Gucci, and Alexander McQueen.
Kors' CEO John Idol said the company would look to grow by buying more globally recognized luxury brands like Jimmy Choo.
"... we are really looking to build an international luxury company and less so brands that ... have a greater reliance on wholesale than its own retail strategy," he said on a conference call on Tuesday.
Idol said Jimmy Choo would be run independently with minimal interference from Kors' management and that he doesn't want the two brands to be linked with each other.
But analysts said while this could be the right approach for Coach, which has a creative, forward-thinking team, it could overwhelm Kors, at least initially.
Kors will need to have a deep understanding of demand, it will have to innovate to drive excitement, maintain the trueness of the brands it acquires, and little or no overlap with other brands in its portfolio, said Jason Green, CEO of customer strategy firm Cambridge Group.
For now at least, analysts said, Kors should be looking to walk before it runs.