Tapestry Buys Michael Kors, Versace For $8.5B

Move over, Kering and LVMH. Tapestry wants to be the new luxury giant in town. The company, which owns Coach, Kate Spade and Stuart Weitzman, has gone shopping, buying Capri Holdings for $8.5 billion.

Capri owns Versace, Jimmy Choo and Michael Kors, and plans call for the newly formed company to operate them as six distinctive brands. Tapestry's announcement says the deal will help it move into new product categories, consumer segments and geographies.

Tapestry, based in New York, says that the combined companies had $12 billion in sales in 72 countries last year, and almost $2 billion in operating profit. Operating synergies will trim some $200 million from expenses.

The combined company will be the fourth largest luxury company in the world, writes Neil Saunders, managing director of GlobalData, with a combined market share of around 5.1% of the luxury goods market. "In the Americas, the company will be the second largest luxury player behind LVMH, with a combined share of 6% of the luxury goods market."

That house-of-brands approach has worked well for LVMH, the world's largest luxury company, with some $87 billion in annual sales, from brands like Louis Vuitton, Tiffany and Sephora. And Kering, owner of Gucci and Yves Saint Laurent, has annual revenue of about $22 billion, followed by Richemont, owner of Cartier and Van Clef & Arpels, with $21.7 billion.

Others question whether the Tapestry/Capri merger can even be called a luxury deal. “Coach, Kate Spade and Michael Kors are aspirational products rather than luxury brands,” says Milton Pedraza, chief executive officer of the Luxury Institute. "They may be premium brands, but they're still mass brands."

That means they are more vulnerable to downturns as upper-middle-class shoppers get squeezed out of the pricey handbag market.

True luxury consumers, Pedraza says, may not be immune to economic dips, but they are more resilient. And while higher-end consumers likely make up the backbone of sales at Jimmy Choo, Stuart Weitzman and Versace, "those businesses account for a small amount of the merged company’s total."

A core problem is that aspirational brands lack the pricing power of luxury brands. "Luxury like Chanel and Hermes don’t go on sale, and they're not sold at outlets. Once a brand is marked down, consumers no longer trust you as an investment product."

Pedraza believe that for Tapestry, elevating Coach, Kate Spade or Michael Kors to that level of luxury would be "a nearly impossible lift.”

Overall, he is skeptical. “Two mediocre entities don't create a great one."

Saunders also sees risks. "Tapestry is taking on the mess of Michael Kors – a declining brand that, while well known, does not have a clear position in the marketplace and lacks the prestige of many other luxury labels," he writes. And while Tapestry has proven it knows how to solve such problems with the repositioning of Kate Spade, a Michael Kors turnaround "will be far more complex and intricate."

In its latest financial results, Tapestry posted a 5% revenue gain, reaching $1.51 billion, compared to $1.44 billion in the prior year. Sales at Coach gained 11% and rose 10% for Stuart Weitzman. Kate Spade, however, notched a gain of just 1%.

Things were less promising at Capri, where revenue declined 3% in constant currency. That includes a 2.2% drop at Michael Kors, its biggest division, and an 8.6% decline at Versace. Jimmy Choo's sales rose 5%.

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