Tapestry and Capri’s $8.5 Billion Mega-Merger, Explained

It’s a new chapter in American retail.

Tapestry, Inc., the parent company of handbag brands Coach and Kate Spade, has acquired Capri Holdings, the group behind Michael Kors, Jimmy Choo and Versace, in an $8.5 billion transaction — a deal that has the potential to dramatically reshape the US global fashion.

Together, the expanded group, which also includes Tapestry’s shoe label Stuart Weitzman, will generate just over $12 billion in annual revenue, putting it ahead ahead of American fashion conglomerates, such as PVH Corp., owner of Calvin Klein and Tommy Hilfiger.

The question now is whether Tapestry has the scale, and the right brands, to compete with European luxury heavyweights Kering and LVMH. With Versace in its portfolio, Tapestry has an authentic luxury line, along with globally known, more accessibly priced Coach and Michael Kors. But its European rivals are far larger — while Kering’s six fashion brands reported $22 billion in revenue last year, LVMH’s 14 fashion and leather goods labels generated $42 billion.

The success won’t hinge on Coach handbags going toe-to-toe with Gucci or Dior for wealthy shoppers’ attention. But Tapestry will need to keep up momentum at its flagship brand, where savvy marketing and higher prices have recently boosted sales. Most crucially, the company must quickly develop a strategy to boost Capri’s brands. Both Versace and Michael Kors are in the midst of turnarounds.

“This is a compelling financial opportunity first, but it also is an excellent strategic fit for our business,” Joanne Crevoiserat, chief executive at Tapestry, said in an interview with CNBC Thursday morning about the deal that is expected to close next year. “We can leverage this powerful platform we’ve built in our direct-to-consumer model to accelerate growth in those [Capri] brands.”

Tapestry shares fell 16 percent Thursday, reflecting apprehension about Capri’s price tag, the biggest for a fashion acquisition since LVMH’s nearly $16 billion deal for Tiffany in 2021.

Why Is Tapestry Buying Capri?

“Yes, there is logic here, but Tapestry is inheriting a problem child with Michael Kors, and they’re going to have to sort that out,” said Neil Saunders, managing director at GlobalData, a data analytics and consulting company.

Still, their mutual niche in the accessible luxury space allows the entity to dominate a unique segment of the luxury market, one that isn’t in direct competition with the traditional luxury giants in Europe.

“There is always strength in numbers,” said retail consultant Robert Burke. “When you look at American designers as a whole, they’ve enormously lagged behind their European counterparts. This deal is an opportunity for them to carve out their own position in the luxury market.”

Both Tapestry and Capri have long-held ambitions of adopting the conglomerate model in which multiple brands operate under one centralised organisation. It’s a structure that has allowed Europe’s most storied luxury brands to maintain their dominance in the global market.

Tapestry’s and Capri’s key brands, Coach and Michael Kors, are also direct competitors in the accessible luxury handbag space. In many department stores, they occupy adjacent shelves on the accessories floor.

The American rivals made meaningful strides in developing their respective portfolios in the 2010s, but struggled to drive growth through M&A in recent years. The last high-profile deal was Michael Kors’ $2 billion acquisition of Versace in 2018, leading to the company to rebrand itself as Capri Holdings and thus signalling its appetite for future deals. But Capri has struggled to sustain growth for its primary sales driver: Michael Kors, which accounts for more than two-thirds of the group’s total revenue. In the 12 months ended April 1, Michael Kors posted sales of $5.61 billion, down from $5.65 billion in the previous year. (Versace’s revenue rose just 1.7 percent, to $1.1 billion over the period.)

Michael Kors has struggled with a lack of newness in its handbag assortment, according to Jessica Ramirez, senior research analyst at Jane Hali Associates, a retail research firm. It also relies on department stores, which routinely discount its bags. Meanwhile, Versace is facing the end of the luxury boom that boosted sales across the sector for years.

Tapestry has fared better in accessible luxury. Coach, for example, has raised prices in recent years without driving customers away. By eliminating unprofitable wholesale accounts and investing in marketing, its sales have continued to grow, even as consumer spending softened overall.

“There are definitely synergies,” said Ramirez. “At Tapestry, there’s the strength of Coach and its turnaround, and all of the learnings from that can be applied to Kors.”

What Will the Combined Entity Look Like?

In the investor presentation about the acquisition, Tapestry executives highlighted the expanded entity will have more than 33,000 employees, while also saying they anticipate post-merger cost savings of $200 million over the next three years.

The most meaningful integration will be that of backend operations like logistics, legal, human resources, real estate, wholesale distribution and infrastructure for digital marketing, according to Saunders.

“All of those central functions will be merged,” he said. “But I think they’ll leave brands intact. You have to leave brands enough space to breathe and develop, though there might be some shakeup at Michael Kors.”

Tapestry already has a great foundation of operational excellence, according to Cowen analyst Oliver Chen, pointing to the internal customer data platform it had recently built.

Such platforms “are complicated and expensive to build, but it’s been working at Tapestry,” said Chen. “It’s really helped them with personalising customer contact, price optimisation and inventory management, and everything from engagement, fulfilment, order tracking, returns, AB testing and analytics reporting.”

“Having this elite system will be very helpful in improving Michael Kors,” he added.

Chen added that regulatory approval of the deal will depend on whether anti-trust concerns are addressed.

Crevoiserat in the CNBC interview underscored the “complementary” nature of the two companies. “We’re gaining access to parts of the market where we haven’t had access, the higher-end luxury parts of the market,” she said. “They’re distinctive in the market with distinctive customer segments.”

How Will a Bigger Tapestry Stack Up Against European Rivals?

As the face of American luxury, brands like Coach and Ralph Lauren are often compared to European heritage labels like Chanel, Louis Vuitton and Hermès. But it’s a misleading comparison.

Some of the most popular Coach bags cost around $300; Kors bags run for much less. In comparison a new Gucci can cost upwards of 10 times that. And it’s evident in the operating margins: Hermès, whose Birkin bag exceeds $10,000 at retail, has an operating margin of 43 percent. That’s compared to 16 percent for Tapestry and Capri.

For Tapestry, “the real opportunity is playing into that aspirational and accessible luxury customer who has been left to the side when you think about how strong Coach and Kate Spade were back in the day,” Burke said.

Tapestry could also use the deal to help it redefine American fashion, which has lacked in recent times a large umbrella company that can invest in promising independent designers.

Kors and Coach have routinely shown at New York Fashion Week even as many other big brands have been absent in recent seasons. Their visibility on the front lines of fashion, as well as Tapestry’s new mix of both accessible and high-end luxury brands, makes it well-placed to tap some local talent. There’s plenty of precedent, including Peter Do’s soon-to-debut turn at Fast Retailing’s Helmut Lang.

“There is some great talent out there,” Burke said. “The fact that Thom Browne was acquired by Zegna for half a billion dollars tells you there is plenty of home-grown talent.”