The Deal: Searching for the Next Michael Kors at Fashion Week

NEW YORK ( The Deal) -- The beginning of every February and September heralds a new fashion season, but one that has nothing to do with the weather currently outside.

That's because major fashion brands from Ralph Lauren ( RL) to Calvin Klein ( PVH) to Michael Kors ( KORS) are showing off their latest wares for a season months away.

This September the clothes snaking their way down the runways are for spring and summer in 2014 and won't be seen on racks and shelves until January.

The rotation begins with a fashion week in New York City, and makes its way through London and Milan, ending in the world's fashion capital, Paris.

Although the events are organized as separate fashion weeks by those cities' local trade organizations, the procession really constitutes a Fashion Month, with many of the same globetrotters hopping from city to city, show to show, all in hopes of seeing something new.

But over the past few years the fashion crowd has been forced to acknowledge a new presence, industry watchers said, as investment bankers and partners at private equity firms have taken seats alongside magazine editors, store buyers and fashion critics.

What they are looking for has less to do with what's caught in fashion's klieg lights, and more to do with whether the company putting on the show they are attending could be the next Michael Kors Holdings Ltd. or Prada SpA Group.

But most bets in the fashion world go awry. Success is difficult to replicate -- think hitting the lottery rather than applying a scientific formula. Still, the brands that have made it big provide some guidance for investors eager to bankroll next season's breakout hit. In a word: Accessorize.

Michael Kors has been around since the 1980s, but thanks to the designer's stint on the reality television show Project Runway, a slick American sportswear aesthetic and a group of talented executives and investors who dusted off the brand, it went from rags to hot-selling handbags the world over.

The company went bankrupt in 1993, was sold off in 2003 by a group including luxury giant LVMH Moet Hennessy Louis Vuitton -- a move suggesting the luxury giant saw no real future for the business -- and finally held an eye-popping initial public offering in December 2011. Today Michael Kors is trading near its 52-week-high, last closing above $74 a share, with a market cap of nearly $15 billion.

The team of investors behind the company -- CEO John Idol, Silas Chou and Lawrence Stroll -- previously engineered the success of Tommy Hilfiger Corp., which went public in 1992 and eventually made its way into the hands of clothing conglomerate PVH Corp ( PVH). In 2003 Sportswear Holdings Ltd., owned by Stroll and Chou, acquired an 85% stake in Michael Kors for $100 million, buying out LVMH, Onward Kashiyama Co. Ltd., and John Orchulli, Kors' business partner.

Michael Kors' market cap is a multiple of Ebitda (earnings before interest, taxes, depreciation and amortization) that is more akin to that of a high-tech growth giant than the rag trade. For the 12 months as of June 29, Michael Kors had Ebitda of $770 million and an enterprise value of $14.3 billion, equating to a multiple of nearly 18.6 times.

That's the success that has investors crawling all over the Fashion Week tents wondering who could be transformed into the next hit.

Of course, blockbuster fashion brands are not necessarily new. Designer Ralph Lauren probably created what was the first true powerhouse fashion apparel brand, raking in billions in market value over the years after his Ralph Lauren Corp. began trading on the public markets in 1997. Today that company is also worth nearly $15 billion.

The multibillion-dollar market cap serves to reinforce the Ralph Lauren image of other-worldly wealth and privilege based on a fantasy of American aristocracy and old money with influence from the British.

When PVH acquired the much-coveted Calvin Klein brand, with its aesthetic of sleek modern minimalism -- and then Tommy Hilfiger, a competitor and copier of Ralph Lauren, followed by the rest of Calvin Klein it did not own with the acquisition of Warnaco Group Inc. -- the company transformed itself from a stodgy maker of men's dress shirts into a clothing giant.

The successful powerhouse brands may ooze luxury, but their businesses are built on selling accessible aspirational products to the masses.

For Michael Kors, that means accessories, with handbags costing perhaps a few hundred dollars apiece on average. Expensive enough to seem a splurge for most people but not so expensive as to limit the brand's market to the 1%.

At Ralph Lauren, it's not the high end that makes the money, but myriad ancillary lines that sell in department store chains, like Macy's Inc. ( M).

Calvin Klein rakes in cash hocking fragrance, underwear and denim. It soon hopes to take advantage of the demand for accessories, too.

For now, accessories are the real stars of the fashion world, with clothes serving as a backdrop or as the supporting cast. A buyer can still carry the "it" bag of the moment whether he or she is short or tall, thick or thin. The products all come in one size, and can be easily identifiable through design and name brand, a billboard advertising one's affluence. The labels feed the narcissism of contemporary consumers encouraged by social media, according to Bud Konheim, CEO of fashion apparel company Nicole Miller.

And in a global marketplace, where regional dress can greatly vary between Europe, the Middle East and India, accessories are an easier sell, said Mortimer Singer, CEO of Marvin Traub Associates.

Finding the next fashion hit takes more than slapping a high price tag on a hunk of leather or bolt of fabric. And some companies just never make it.

According to one industry banker, many of Kering SA's (formerly PPR SA) investments in younger brands have not translated into good investments. The company remains largely reliant on flagship brands, like Gucci, while Alexander McQueen, for example, has potential with global recognition, but its sales remain small, the banker said. The company's latest investment is in Altuzarra, helmed by Joseph Altuzarra, one of the hot young emerging designers of his generation.

Singer pointed out that luxury conglomerates' need for growth is driving investment in increasingly smaller brands.

Beyond the giants, some investors may believe -- erroneously -- that fashion is easy. Prominent examples of new designers quickly becoming superstars can create the impression that money and slick marketing will guarantee bright lights and glitzy parties. The prestige of investing in a hot luxury brand exerts a magnetic pull. For every success, however, there is a fashion graveyard filled with hundreds of labels that never find a market.

Cathy Leonhardt, a managing director at investment bank Peter J. Solomon Co., cautioned that while brands can come out of nowhere and become really big, really quickly, generating high margins, risk is involved.

Michael Kors can make it look easy. But that success grew out of a combination of solid planning, good timing, the right investors behind the brand, the best executives running the show and trusted sourcing or manufacturing partners that put products in stores on time. Only then did the brand earn the support of magazine editors and retail buyers.

So what brands are fashion experts watching? According to Singer, the Diane von Furstenberg Studio LP label, helmed by designer Diane von Furstenberg, with its version of the European jet set, has the most promise as a potential next Michael Kors.

There is also a lot of buzz around future IPO candidates, including Tory Burch LLC, with its version of downtown preppy and its own strong accessories businesses, and Marc Jacobs International LLC, majority owned by LVMH.

LVMH said recently that the designer Marc Jacobs would leave his creative role at luxury goods unit Louis Vuitton to focus on his namesake brand. It plans to take Marc Jacobs International public within the next three years.

Singer said Moncler SpA, a category killer in luxury outerwear, is worth watching as it prepares to go public in Milan over the next several months. The company is backed by private equity firms Eurazeo SA and Carlyle Group.

Publicly listed Fifth & Pacific Cos. ( FNP), parent to Kate Spade, Juicy Couture and Lucky Brand, plans to sell Juicy Couture and Lucky Brand to focus on Kate Spade accessories. Investors hope that it will become the next Coach Inc. ( COH), another accessories success story with a market cap over $15 billion.

Industry sources said that once Fifth & Pacific jettisons two brands and becomes Kate Spade, it will be a prime target for both strategics and private equity. The bet is that Kate Spade will get acquired for a healthy premium.

One brand among the newer arrivals at fashion week with a legitimate shot at becoming a future powerhouse accessories company is Rebecca Minkoff LLC, which is backed by private equity firm TSG Consumer Partners LLC.

In the seven years since its founding in 2005 -- propelled by the designer's oversized "Morning After Bag" -- the brand grew into a $60 million business by 2012, up from about $10 million in 2009, according to Inc. magazine, growing 500%.

And it's that youth that gives investors hope. Granted, $60 million in sales is a long way from $1 billion, let alone a few billion dollars -- something executives at the fashion company would acknowledge.

But Rebecca Minkoff has a strong partner in China, which manufactures the company's accessories. Its partner plans to open 35 stores across that country, betting on the growth of China's middle class and a shift in demand to more accessible contemporary luxury goods.

Success for these brands, according to Leonhardt, relies on having an aesthetic that consumers on the street can easily identify with or relate to, and of course, just offering up desirable product. But there is no formula, she added.

Helping to fuel the growth of such companies is not only accessories, but a growing middle class in emerging markets. There may not be 20% growth in China, for example, Leonhardt said, but there will still be attractive opportunities for expansion.

And perhaps more shows in, say, Shanghai.

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