America Still Doesn't Have Its Answer to LVMH
Tapestry and Capri have both struggled to form groups that can compete on a global scale.
NEW YORK, United States — Things are not going as planned for Tapestry Inc. and Capri Holdings Limited, the budding American fashion groups with ambitions to take on European rivals — and sector dominators — LVMH and Kering.
Both companies once again reported tepid results this week. Coach-owner Tapestry beat analyst profit projections, but weak results at Kate Spade New York, which the group acquired in 2017, disappointed. Sales at Stuart Weitzman, another acquisition, are also on the decline. The results came just two months after the dismissal of Tapestry Chief Executive Victor Luis. (Shares halved during his five-year tenure.)
Capri, the parent of Michael Kors, Versace and Jimmy Choo, missed earnings estimates, citing challenges in Hong Kong amid the continued protests.
It’s not just this earnings cycle, though. Tapestry and Capri may both want to be the world’s next major fashion group, but early efforts have proven that it's not going to be easy, if it's possible at all.
Their first challenge is positioning. Spoilt for choice, consumers are less interested in mid-priced products available at scale: they want dangerously affordable fast fashion or pure luxury. (And preferably at a discount.) It’s harder for consumers to see the value in something that is not cheap but not that expensive, either. Especially if it’s not utterly unique. That’s a problem for Tapestry in particular, which deals exclusively in accessible luxury.
When Luis first set out to build the group, he focused on operational improvements, whittling down wholesale partnerships and paring back markdowns. For Coach, this strategy has resulted in eight consecutive quarters of positive comparable sales, although that modest growth is coming from outside North America, where sales are flat.
With the acquisition of luxury brands Jimmy Choo and Versace, Capri has aimed to move upmarket, broadening Michael Kors’ high-end offering with hopes of relying less on the squeezed middle. It also closed some Michael Kors stores and pulled back on discounts in the wholesale channel. But the $2.1 billion purchase of Versace was expensive, and investors expect the Kors brand to throw off cash so that the company can put more money into scaling the Italian fashion house.
Investors seem unconvinced that either plan will work. Tapestry shares are down 20 percent in 2019, and Capri is down about 5 percent in the same period.
At Tapestry, the focus is on turning around Kate Spade, where global comparable store sales decreased 16 percent in the most recent quarter. But Kate Spade is not the only problem. While each of its three brands have strong DNA, the company has failed to produce a breakaway hit.
At Capri, Versace may be growing fast in the US and Europe, but those gains were offset in the most recent quarter by the hit the brand took in Hong Kong and mainland China. And net sales at Kors are still on the decline. Sales at stores open at least one year are up, though, which Chief Executive John Idol attributed to a return to core product that the brand’s fans love.
“We kind of made a mistake,” he said in the earnings call Wednesday, pointing to how Kors had pulled back from its signature items in previous quarters. “[Now] we’ve course-corrected and in our own retail we’ve seen some very strong selling that we’re extremely pleased with.”
Still, there is dissonance between Idol’s vision for Capri as a true luxury player versus Kors’ position in the market today as an accessible brand.
LVMH and Kering understand that they are building brands to last — and this requires considerable time and capital. To make it happen, they rely on marquee brands to fund the development of smaller brands. Louis Vuitton and Dior, for instance, drive significant sales — and profit — within the LVMH universe, generating enough to cash so that group is able to experiment with new ventures (like Rihanna's Fenty fashion line) and acquire other big players. (Most recently, it bid $14.5 billion to buy Tiffany.)
Tapestry and Capri need to cultivate their own version of Louis Vuitton in order to move forward— and satisfy impatient investors.