Coach Owner’s Luxury Tie-Up Can’t Fix Everything
Tapestry’s mega deal attempts to imitate European luxury art of scale
In the world of luxury, Europeans have mastered the art of scale far better than the Americans. Coach owner Tapestry is trying to change that with its splashy acquisition of Versace’s owner, but it won’t be easy.
Tapestry, which also owns Kate Spade and Stuart Weitzman, on Thursday said it will buy Capri Holdings, owner of Michael Kors, Versace and Jimmy Choo, for a hefty 59% premium over its 30-day volume-weighted average price ended Wednesday.
The $57-a-share cash purchase pegs Capri’s enterprise value at 9.9 times trailing 12-month earnings before interest, taxes, depreciation and amortization—closer to Tapestry’s own 9.1 times multiple Wednesday. Before the acquisition, Capri was going for a more modest 7.55 times multiple.
Going big makes a lot of sense for luxury brands; deep pockets mean access to prime properties and advertising platforms. Case in point: Companies such as Louis Vuitton owner LVMH and Gucci owner Kering have grown at a much faster pace than smaller peers such as Salvatore Ferragamo and Burberry in the past five years.
Tapestry said it sees opportunities for more than $200 million in synergies over the next three years from reducing operating costs and finding supply-chain efficiencies. Neil Saunders, managing director of research firm GlobalData, pointed out in a note that Tapestry has better marketing and digital platforms, both of which should help grow Capri’s brands. Notably, 88% of Tapestry’s sales are from its own stores and websites, while just 68% of Capri’s business comes from the direct-to-consumer channel.
The acquisition also expands Tapestry’s portfolio to more elevated luxury brands Versace and Jimmy Choo and gives it greater exposure to Europe.
Despite the obvious benefits of scale, though, Tapestry investors aren’t completely sold. Its shares tanked 13% in morning trading after the deal was announced, dragging its enterprise value down to 8.2 times trailing Ebitda—a 20% discount to its five-year average and deepening the valuation gap to European competitors.
There are good reasons for a healthy dose of skepticism. For one, the deal brings the problems of Capri’s Michael Kors brand, which makes up the biggest revenue source but has faced weak demand in recent quarters. The brand’s accessible price positioning makes it particularly vulnerable to pullback from middle- and lower-income consumers. Tapestry’s experience handling a successful turnaround of Coach, which previously suffered from brand dilution after too-frequent promotions, could come in handy here.
Additionally, Tapestry is taking on a hefty $8 billion worth of debt to fund the purchase. Getting to its target leverage ratio of 2.5 times debt to Ebitda could prove to be an uphill battle as demand for luxury—especially in the U.S.—is slowing down.
Crucially, there is one thing that scale won’t be able to bring for Tapestry: Patient capital. European giants such as LVMH, Kering, Hermès and Richemont are all family controlled, which means they tend to be conservative on debt and have the luxury of making decisions that preserve brand cachet—even at the expense of slower near-term growth. By contrast, Tapestry’s executives are subject to the shorter-term whims of shareholders that place more importance on quarterly results.
Going big won’t solve all of Tapestry’s challenges.