Why everyone believes Versace’s quiet luxury pivot led to losses and its eventual sale to Prada

Anyone who hasn’t been under a rock for the last 48 hours probably knows that Prada has agreed to buy the Versace fashion brand for €1.25bn ($1.38bn) from the fashion conglomerate Capri Holdings. Though it may come across as shocking that Prada is engulfing one of its more prominent rivals, a number of elements came together to cement the deal, with Versace’s multiple branding pivots being a primary issue.

How Prada agreed to buy rival fashion house Versace

It’s no secret that Versace was sold at a roughly $700 million loss after the brand’s shift to muted designs and price hikes resulted in a drop in sales. Experts widely believe that fashion executive John Idol decision to change the brand aesthetic and increase prices led the brand to a struggle. When his company, Capri Holdings, acquired the fashion house in 2018, he expressed optimism that his strategy would double the brand's revenue within ten years. However, six years later, that vision has unravelled.

Idol sold Versace to Prada for $US1.38 billion ($2.2 billion), resulting in an estimated loss of about $US700 million, and the sales growth is significantly off track. Capri expects Versace to report around $US813 million in revenue for the current fiscal year ending in March, which is lower than the $US843 million in sales it recorded in fiscal year 2020, the first complete year under Capri's management.

Versace's future is now in Prada's hands, a brand that has successfully navigated the recent decline in luxury spending. Last year, Prada, which also owns the Miu Miu brand, saw its revenue increase by 17 per cent. In contrast, analysts surveyed by Bloomberg anticipate a roughly 20 percent decline in Versace's sales for the fiscal year ending in March compared to the previous year. Capri also manages Michael Kors and Jimmy Choo, both of which have experienced sales declines.

In a statement on Thursday announcing the sale, Capri indicated it would use the proceeds from the Versace transaction to invest in Michael Kors. Bernstein analyst Aneesha Sherman remarked in a research note on Thursday that selling Jimmy Choo would likely be a sound move for Capri.

When Idol took charge of Versace, the brand was recognized for its intricate designs and iconic Baroque print, but he later shifted focus to align with the more subdued "quiet luxury" trend. Idol commented that this change was necessary as Versace had become too dependent on its signature print. "You don’t want a store that is 70 percent Baroque – and that became a bit of a crutch for the company," he stated during a February call with analysts.

He also acknowledged that the transition was too sudden. While affluent shoppers embraced the more understated designs, the mid-tier customers who drive Versace's sales did not respond positively, leading to a slowdown in revenue growth. "It’s not been the turnaround story that they wanted it to be," Sherman said in an interview. "The strategies haven’t been the right strategies." Additionally, Versace raised prices and reduced the number of affordable items in its inventory.

"We went too far, too fast," Idol admitted in February. "Customers who used to shop with us came in and said, ‘I like that, but I can’t afford all of that.’ Probably the customers are sitting there saying, ‘Wait a minute. What happened to the old Versace?’"

Currently, Versace is working to rectify the situation by lowering the price points of some key items. This fall, for example, silk shirts will start at $US990 instead of the previous $US1500, and their sneakers have been made more affordable, with the Galaxia style starting at $US550. The brand also reduced its discount levels.

In March, the company announced Donatella Versace would be stepping down as chief creative officer, a position she had occupied since 1997. Dario Vitale, a former executive at Miu Miu, took over her position on April 1. "We are confident that his talent and vision will be instrumental to Versace’s future growth," Idol stated regarding Vitale in his announcement.

Capri’s chief financial officer, Thomas J. Edwards, departed in April to become CFO and chief operating officer at Macy’s. “His departure comes at a precarious time,” noted Telsey Advisory Group analyst Dana Telsey in a research note. "Leadership transitions always carry an element of risk."

Risks have escalated further, and Capri's shares have continued to decline since former President Donald Trump announced plans to implement significant tariffs. The sale of Versace to Prada marks a bittersweet victory for Idol, who has led Capri since 2003. The market responded positively when news of a potential buyer for Versace broke, with Capri shares rising on March 3 following Bloomberg's report on the deal talks.

Idol's intention had been to sell the entire company to Tapestry Inc., which owns Coach and Kate Spade, for $US8.5 billion in 2023. This would have provided Idol with a grand exit after decades in leadership at Capri. However, this potential achievement was thwarted last year when a federal judge ruled that the merger of the rival conglomerates would harm competition in the U.S. handbag market.

Idol had tried to transition out of his day-to-day executive role starting in 2021 when Capri's board appointed Joshua Schulman to lead the company, enabling Idol to take on the role of executive chairman. However, several months later, in a surprising turn of events, Capri announced Schulman’s departure and that Idol would continue as chief executive and chairman.

While the legal battle over Tapestry's acquisition of Capri unfolded, Idol and his team seemed unprepared and did not appear to have a contingency plan for their remaining brands.