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Michael Kors designs a successful IPO

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SARAH SKIDMORE | December 15, 2011 05:04 PM EST | AP

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PORTLAND, Ore. — Michael Kors understands what fashion-conscious shoppers desire. Apparently, he knows what investors want, too.

The market clamored for a piece of the designer's company, Michael Kors Holdings Ltd., in its initial public offering.

It had planned to sell about 41.7 million shares for between $17 and $19 each but priced at $20 Wednesday night. The company raised $944 million after selling 47.2 million shares in the IPO, valuing the company at $3.8 billion.

Shares closed their first day of trading Thursday at $24.20.

The success of the Michael Kors IPO is a testament to the designer's popularity and the resilience of well-to-do shoppers in an otherwise weak economy. It also defies a soft year for companies looking to raise money through new offerings of stock. And for Kors personally, it means a payday of more than $100 million.

"The IPO market has not shown grandiose returns, but this was on everyone's buy list," said Scott Sweet, a senior managing partner at IPOBoutique.com.

Kors is an American designer who became a household name in recent years as a judge on fashion design competition show "Project Runway". He has been among the top names in fashion for years, dressing countless celebrities, and even First Lady Michelle Obama, in his signature simple style with a hint of high-fashion glitz.

His designs, which are more practical luxury than haute couture, have made him an enduring hit with both men and women.

The company, based in Hong Kong, makes high-end handbags, shoes and clothing that it sells at its own shops and through other retailers. A Michael Kors crocodile handbag can run more than $2,000 and a halter dress more than $7,000, but the bulk of its business is centered on more affordable luxuries for well-off shoppers such as $300 sunglasses and $600 purses.

While most consumers are feeling the drag of the economy, wealthy shoppers in the U.S. and abroad are spending more freely. That has helped companies such as jewelry seller Tiffany & Co., handbag maker Coach Inc. and luxury retailer Nordstrom Inc. recover from the recession faster than the rest of the industry.

In 2011, U.S. retail sales of luxury items are up more than 5 percent from a mid-recession low in September 2009, according to an estimate by MasterCard SpendingPulse.

Michael Kors has been one of the beneficiaries of that spending. The company's net income soared 85 percent to $56.9 million in the 2011 fiscal year and its sales increased 58 percent to $803.3 million in 2011. Sales at stores open at least a year, considered a key indicator of a retailer's performance, jumped 31 percent during the first two months of its third quarter, which ended Nov. 26.

The company's strong performance is helping to fuel rapid expansion. It added 30 stores in its 2010 fiscal year and plans to open 40 more in fiscal 2011. The company currently operates 184 stores in North America and 37 internationally.

Its growth potential makes it stand out in a less-than-stellar year for the IPO market. In 2011, the total number of IPOs filed rose nearly 5 percent from 2010, according to Renaissance Capital, an IPO-focused investment firm. The number that actually made it to market fell 20 percent as many companies either withdrew or postponed their offerings because of skittish financial markets. Adding to the malaise, total proceeds raised through IPOs have fallen 11 percent.

"You have to separate the overall market environment from a company like Michael Kors that is in a very strong growth period," said Linda Killian, principal at Renaissance Capital. "Investors want to own a company like this, irrespective of what is going on in the market."

Prada and Salvatore Ferragamo, two other luxury brands, went public this year with limited success. Prada had a lackluster debut in June on the Hong Kong exchange and its shares have fallen 8 percent since. Ferragamo's stock jumped on its first day in trading in Milan, but it has climbed only 9 percent since.

Analysts say Michael Kors could fare better because it is a younger company, has a more recognized name and it targets a broader swath of shoppers. It has gone public in its growth phase, while Prada and Ferragamo made their debut much later in their development.

Still, there is some risk. Some analysts worry the potential growth of the luxury market is overblown and that wealthier shoppers could retreat if more economic tumult hits.

"Luxury has been strong," said Morningstar retail analyst Paul Swinand. "But I worry that we are at the peak."

Michael Kors stock trades under the ticker symbol KORS. Morgan Stanley, JPMorgan Chase and Goldman Sachs were lead underwriters on the offering.