Tapestry & Capri — Luxury’s New Power Duo?
Disclaimer: The opinions in this article are entirely my own and do not reflect investment recommendations.
In early August, Tapestry (parent company of Coach, Kate Spade, and Stuart Weitzman) announced its acquisition of Capri Holdings (parent company of Michael Kors, Jimmy Choo, and Versace). You may be wondering — why is an American holding company buying high-end, European fashion brands?
At first glance, the deal seemed unexpected. While a Coach / Michael Kors combination makes strategic sense, it is unclear what the rationale is for purchasing the remaining Capri brands. Tapestry is, at its very core, an American brand, while Versace and Jimmy Choo have European origins. Coach, Kate Spade, and Stuart Weitzman products are targeted towards a mid-tier, more price sensitive customer base than the individuals purchasing Jimmy Choo shoes. It’s hard to imagine someone in the iconic Versace silk shirt with a Kate Spade handbag. So, it’s natural that investors are curious.
One common hypothesis is that the American company is looking to make a splash against LVMH and Kering, the prominent luxury fashion holding companies known for their acquisitions of brands like Dior, Saint Laurent, and Bottega Veneta respectively. No other player has been able to come close to achieving the scale and profitability that these conglomerates have, but this business might be willing to give it a try. Needless to say, there is a wide array of obstacles that lie ahead.
Let’s get into a few of those.
Apart from competing in a saturated market, Tapestry will have to grow in the face of adverse economic conditions. In March 2023, Citi’s credit card data revealed that U.S. luxury spending had declined to the lowest monthly rate in three years. Even LVMH reported a slowdown in U.S. sales during its earnings release in July, and Kering saw muted top-line growth in the latest quarter. With recession fears looming over the horizon, American shoppers are holding back on indulgent purchases, and it is unclear when this trend will shift. In this new merger, four out of the six brands have North American roots, so it will be quite an undertaking for the business to grow meaningfully while its biggest customer base cuts back.
Looking at Tapestry’s acquisition history, its most recent purchase, Kate Spade, was far from a resounding success. The business paid $2.4 billion to buy Kate Spade in hopes of capturing more millennial customers, but the acquisition has eroded the parent company’s operating margins due to its high cost structure. These post-acquisition challenges and reliance on the U.S. markets could be serious impediments to growth.
Amidst the challenges ahead, there are multiple ways for this transaction to be a sensational success. First off, Tapestry is a much older and mature company, while the Jimmy Choo brand is not even 30 years old. This could be a great opportunity for the business to shape the creative vision for Jimmy Choo, without feeling the pressure of maintaining a strong legacy. Historic powerhouses like Hermes and Chanel have been around for 100+ years and embody a certain aesthetic and reputation that must be upheld, whereas Jimmy Choo has a runway to figure out its long-term identity in a way that accelerates profitability.
While Versace and Jimmy Choo are high-end luxury brands with more customers in Europe and Asia, they have an opportunity to utilize Tapestry’s strength in omni-channel marketing and DTC sales to capture millennial and Gen Z customers in North America. In digital marketing, Coach has evolved to become more appealing to a younger audience with its “Courage to Be Real” campaign with Lil Nas X as an ambassador. It uses video-generated content and encourages individuals to embrace their true selves. Meanwhile, its close comparable from Capri, Michael Kors, developed a shopping app just this year and has a long way to go in e-commerce. Additionally, nearly 90% of Tapestry’s sales are derived from DTC, while Capri is much more focused on wholesale channels. Another key difference is that ~30% of products sold by the American company was achieved through digital channels, whereas Capri falls just under 20% for the same metric. With the surge of Tik Tok and the influencer era, digital marketing must be leveraged to appeal to younger audiences. By 2030, 80% of the global luxury purchases is expected to be driven by millennials, Gen X, and Gen Y, so it is important for this new strategic combination to tap into those demographics quickly.
Additionally, having access to a more international customer base will give the combined company a chance to share knowledge on regional consumer behaviors and marketing tactics. Tapestry brands should leverage this to expand their own geographic focus within Europe and Asia. In its Q4’23 earnings report, the company reported a decline in North America sales for FY23, while Europe and Asia (specifically, Japan and China) sales were up 7% and 20%, respectively. The business attributed international sales growth to a tourism increase within those regions, so tapping into the Europe and Asia markets will be a key accelerant.
Also, the executive team should focus on creating an effective structure that allows each brand to operate independently under one organization. It is worthwhile to implement information sharing across functions like marketing, sales, customer success, and technology so that best practices are widespread. For example, Tapestry has superior technology infrastructure and data analytics capabilities, which should be leveraged by all brands to gain valuable customer insights and run efficient internal operations.
Since the current CEOs of Coach and Kate Spade have only worked with North American brands, recruiting senior leaders with international fashion experience should be a key priority. This is one area where cross-functional expertise could be valuable because the Capri executives have operational experience at global luxury companies like Saint Laurent and Alexander McQueen. Having a strong management team will be beneficial as the entity competes against LVMH and Kering.
In an environment of rising interest rates, tighter debt markets, and uncertainty around economic growth, the Tapestry / Capri merger announcement was a welcome surprise. Undoubtedly, fashion gurus and investors alike will be keeping a watchful eye on the outcome of this transaction to see whether it can truly capture significant market share.
