Coach, Michael Kors Tie-Up Opens a Curious Bag of Antitrust Concerns
Proposed merger’s fate might rest on the definition of ‘affordable luxury’
Coach owner Tapestry’s TPR 0.30%increase; green up pointing triangle quest to become an American luxury giant is turning out to be quite the uphill battle.
The Federal Trade Commission is reportedly preparing a lawsuit to block Tapestry’s proposed acquisition of Michael Kors owner Capri Holdings CPRI 1.85%increase; green up pointing triangle, according to a report Wednesday from the New York Times.
Whether the deal creates market-share concerns depends on the definition of the market in question. Coach and Michael Kors combined had a 17% share of the North American bag market in 2022, according to a report from Bernstein, citing Euromonitor data. Narrow that down to luxury bags and the two brands’ combined market share rises to 26%. Whittle that further to “affordable” luxury bags, and the FTC appears to have a stronger case: Coach and Michael Kors command a 53% share in North America.
The narrow definition, however, might be hard to justify. Bernstein says it defined “affordable” luxury not by a specific price tier but “manually,” by excluding certain luxury houses like Hermès. Both Coach and Michael Kors have products with pricing that overlaps with high-end luxury brands such as Louis Vuitton and Gucci, as well as nonluxury bag brands such as DKNY and Cole Haan. Coach’s selection ranges from a $150 cross-body pouch bag to a $10,000 limited-edition alligator bag.
Will the combination lead to higher prices? Possibly, but within limits. Tapestry has turned Coach around by getting more customers to pay full price and preventing products from ending up on clearance racks. In a November earnings call, the company said the Coach brand has increased its average pricing by more than 30% over three years. Surely one of the compelling rationales for Tapestry’s acquisition is to pull off a similar feat at Michael Kors, which is suffering from the same problem that Coach had years ago. But being in the “affordable luxury” segment is precisely what creates a natural price ceiling for Coach and Michael Kors: Neither can afford to push up prices too much for fear of losing out to more exclusive luxury brands.
Moreover, fashion has a relatively low barrier to entry and a consumer looking for a midtier bag still has plenty of choices. A search on Macy’s website for bags priced from $100 to $500 yields results for more than 70 different brands. Importantly, scale alone hasn’t helped Tapestry and Capri. Data from Euromonitor shows that both companies’ market share of the North American luxury leather goods market has shrunk from 2018 to 2022.
Capri stock, which jumped to $53.90 on the deal announcement in August (shy of the $57 offer price), has shed 29% since that peak. The decline reflects investors’ skittishness about the FTC blocking the deal as well as worsening prospects for Capri, which badly missed Wall Street expectations on earnings in its past two quarterly reports following the deal announcement. Besides antitrust risk, some of the Capri discount could reflect a chance that Tapestry gets cold feet. So far, though, Tapestry seems undeterred. A spokesperson for Tapestry said in an email that it has “full confidence in the merits of this transaction and in our legal arguments, should we need to make them.”
At current prices, holders of Capri can expect to make a 48% return if the deal successfully closes. What’s the downside? If investors assume that Capri’s share price—as a multiple of expected future earnings—will revert to pre-deal levels, they can expect to lose about 45%. But that might be a conservative reading: Capri’s disappointing results mean the stock could settle at even lower levels.
The FTC’s antitrust case doesn’t seem like a slam dunk. But the huge potential swings in Capri’s stock price mean an awful lot is riding on the definition of affordable luxury.