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Capri’s Outlook Dims After Tapestry Deal Gets Blocked
This isn’t the way either Tapestry Inc. or Capri Holdings expected their $8.5 billion engagement to end.
But now that the breakup has come — after a preliminary and all-but-final injunction from a Manhattan federal judge — experts said Tapestry is able to move on, keep building on its successful Coach business, and maybe even buy something else.
Capri is another story, with analysts speculating the firm might have to ultimately sell off brands and go private to rebuild.
It’s been an expensive and ultimately disappointing fling.
Tapestry paid $109 million in deal-related expenses and $116.7 million in interest expense on debt accumulated to close the acquisition last fiscal year. Capri recorded at least $25 million in deal-related costs.
But the real price Capri has paid was in the stock market.
The company’s shares had been buoyed by the prospect of the $57 a share buyout by Tapestry, but it collapsed on Friday after the Federal Trade Commission scored a major victory in its antitrust case against the deal, and closed down 48.9 percent to $21.25 Friday, leaving the parent of Michael Kors, Versace and Jimmy Choo with a market capitalization of just $2.5 billion.
The broken deal is partially to blame, but the rest can likely be pinned on the performance of the business since the buyout was signed in August 2023.
Capri’s revenues fell 13.2 percent to $1.07 billion in the first quarter, with Michael Kors down 14.2 percent to $675 million, and overall operating losses of $8 million.
Companies usually go to pains to emphasize their strength, but eight days of court testimony repeatedly illustrated just how much the Michael Kors brand was struggling.
Cedric Wilmotte, chief executive officer of Michael Kors, testified that the brand’s turnaround efforts that would elevate design, unify the brand voice and right-size distribution were off track.
“I believe Tapestry is better equipped to take us through the transition,” Wilmotte said.
And John Idol, Capri’s chairman and CEO, said that while one-in-seven women would be carrying a Michael Kors bag when he left his Manhattan office during the brand’s 2016 peak, the number was maybe “one in 200” today, “if we’re lucky.”
“We’ve worked very hard to get the brand heat back into Michael Kors,” Idol said, acknowledging success has been elusive.
It seems much more needs to be done.
Jessica Ramírez, senior research analyst at Jane Hali & Associates, said the Michael Kors brand hasn’t seen the “true evolution” needed.
“It’s outdated in terms of retail strategy, in terms of product, in terms of go-to market,” Ramírez said. “For a long time, they got very comfortable with what they had in terms of product, and they never really evolved that product.”
Now Michael Kors is going to have to feel its way forward on its own, without the resources of Tapestry, including the playbook it used to turn around Coach.
“I’m assuming that Kors is only getting battered more and more,” Ramírez said. “It is a blessing in disguise for Tapestry not to have to deal with such a huge turnaround. But Capri does also have Versace, and it also has Jimmy Choo. So I imagine it could be dismantled. Michael Kors is such a big project right now that if someone isn’t up to taking it, I think going private might be its best choice.”
Oliver Chen, an analyst at TD Securities, saw a similar picture.
“There could be interest for Versace for the traditional European luxury conglomerates, such as Kering, given the company’s presence among Italian luxury, particularly following the company’s stake in Valentino,” Chen wrote in a research note. “Jimmy Choo and Michael Kors could be taken private by various private equity firms.”
He added: “There is uncertainty around the Michael Kors brand leadership and execution, and we believe the stores and brand need additional investment for growth. In other words, things may get worse before they get better.”
Tapestry, though, seems on firmer footing since the deal ran into a roadblock.
Shareholders pushed the company’s stock up 13.5 percent to $50.49, for a market cap of $11.8 billion.
To fund the deal, Tapestry sold over $6 billion in bonds, which will now expire as the contract runs out on Feb. 10.
“The company may wait until after the results of the election to have greater clarity on the future ambitions of the FTC and [its commissioner Lina] Khan before assessing other smaller acquisitions,” Chen said. “If Tapestry pursued an acquisition, we believe it may have to be in the general accessories or apparel category and outside of handbags. For example: outerwear, jewelry, or lifestyle, such as beauty and wellness.”
While Tapestry and Capri figure out their futures separately, the rest of the fashion world is wondering over the future of deal making and just what the rules are today.
One thing is for certain, the FTC is a player in the space now and fashion is very much fair game.
As Judge Jennifer Rochon wrote in her decision: “Downplaying the importance of handbags as nonessential discretionary items that consumers can simply choose not to buy if the price is too high ignores that handbags are important to many women, not only to express themselves through fashion but to aid in their daily lives — from supporting their career aspirations by transporting their work materials home or inspiring confidence in professional settings, to holding important personal items such as medications or personal hygiene products, to carrying a young child’s snacks or toys.”
