This week, a look at the week’s unexpected acquisition, which has big implications for American fashion. Scroll down to use Glossy+ Comments, giving the Glossy+ community the opportunity to join discussions around industry topics.
A handful of entrepreneurs developing multi-brand fashion empires have been said to be building an American LVMH. In 2016, the New York Times’s Vanessa Friedman questioned whether Adam Pritzker and Vanessa Traina’s Assembled Brands could become the conglomerate’s local counterpart. Four years prior, Anna Wintour described Andrew Rosen’s business as LVMH’s American equivalent. And last year, Naadam’s Matt Scanlan called building “the next LVMH” his business goal.
But on Thursday, Tapestry, Inc. announced its $8.5 billion acquisition of Capri Holdings Limited and gave legs to the once farfetched notion of a leading global fashion group birthed in the states. Once the deal goes into effect next year, one U.S. company will own six major fashion brands bringing in a combined $12 billion in annual revenue. And, due to the brands’ complementary strengths and the company’s potential to grow from there, analysts say that Tapestry, Inc. going head-to-head with Europe’s fashion giants is a feat that could someday pan out.
But also, considering the advantages of big businesses in today’s consumer product landscape, strategic jumps such as this deal may be necessary for U.S. fashion businesses to stand a fighting chance.
“From a strategic point of view, they’re clearly trying to do the American LVMH. And that makes total sense,” said Javier Lastra, CFA, portfolio manager of investment fund Tema Luxury ETF, which has invested in Tapestry, Inc. and Capri Holdings.
Like both companies’ leaders during Tuesday’s investors’ presentation, Lastra pointed to the resulting, risk-lowering diversification within the brand portfolio — namely, across brands, product categories and geographic markets. For example, he said it’s smart to move on from being borderline-“mono-brands” — with a majority of their businesses being driven by Coach (76% in the most recently reported quarter), on the Tapestry side, and Michael Kors (64%), for Capri. “To be just dependent on one brand is very dangerous, very volatile,” he said.
In addition, with Coach, Kate Spade and Stuart Weitzman, Tapestry over-indexes on accessories, while Michael Kors, Versace and Jimmy Choo owner Capri has more success in ready-to-wear, footwear and licensing. And, while both companies count America as their largest market, Tapestry has comparatively more strength in Asia — which makes up 29% of its business, compared to Capri’s 16% — and Capri is more established in Europe; 28% of its business is generated in the EMEA, compared to 6% for Tapestry.
Meanwhile, Capri stands to gain from Tapestry’s digital prowess, while Tapestry will gain access to the thriving, notoriously stable luxury market.
In early 2020, under CEO Joanna Crevoiserat, Tapestry introduced an Acceleration Program intended to make the company “more agile and data-driven, with a digital-first mindset.” The company has since earned 15 million new customers in North America, more than tripled its digital sales and achieved record annual revenue, at $6.7 billion in 2022.
In mid-July, Robin Barrett Wilson, executive fashion advisor at SAP, noted Tapestry’s recent strength, including its brands’ profitability. She owed that to Crevoiserat’s foresight in establishing a digital-fueled path to “end-to-end” change ahead of the pandemic, which exacerbated the need for digital expertise. During Tuesday’s presentation, Crevoiserat said that the realized ability to scale its advanced data and digital platform was a driving factor in Tapestry’s acquisition of Capri.
Jeffries equity analysts Ashley Helgans and Blake Anderson stated in an email that, while they view the deal as positive for Capri Holdings shareholders, they’re “surprised” by Tapestry’s investment, due, in part, to “the momentum with [its] current strategy.”
According to Crevoiserat, all involved companies will retain their leadership teams, and their combined 33,000 employees will stay intact. But there are “synergies” which will work to save the companies a combined $200 million per year, in three years’ time, she said. Tapestry CFO Scott Roe said the companies will benefit from cost-cutting around corporate facilities, logistics, transportation and the supply chain. As for the supply chain, Tapestry has unique expertise in leather goods production that will work to Capri’s advantage, for example. Lastra called the $200 million goal less than ambitious; he expects the companies’ synergies to result in more savings.
In April, while predicting ongoing consolidation and “a lot of acquisitions” in the luxury sector, Boston Consulting Group head of luxury Sarah Willersdorf called out the “tremendous advantage” of scale for luxury companies. That’s particularly in terms of the “power” it affords them when negotiating with wholesale partners and media, for example.
On that note, Lastra said to expect the six Tapestry, Inc. brands to open more stores: “We all know that when a big prestigious mall opens anywhere in the world, LVMH gets the best store,” he said. “But as they gain more scale and financial resources, the brands will get better stores, in better locations. … That’s part of the synergistic benefits.”
Last week, while recording Glossy’s Week in Review podcast, LVMH came up in two of the three news-based segments: Birkenstock going public would be the second company owned by LVMH investment arm L Catterton to do so this year. Meanwhile, Phoebe Philo is getting ready to launch her namesake brand, which has minority backing from the conglomerate. The repeated mentions of the company prompted a discussion about how “the giants keep getting bigger.” The web of companies that are making LVMH money is clearly expansive.
As such, with six brands and a fraction of LVMH’s annual revenue, which was €79.2 billion in 2022, Tapestry, Inc. has a ways to go before comparisons to the company will seem fitting. Lastra expects that after Tapestry pays off debts associated with this week’s deal, a task slated to take two years, it will ramp up its M&A activity. “This is not going to be the last acquisition,” he said.
However, he said that it’s unclear whether the company will lean into the affordable luxury or premium luxury market. “If they want to play in the champions’ league with the European, premium players, they’ll have to [scoop up] more high-end-positioned brands. And that’s a different ballgame,” in terms of the required investment, he said.
Among the challenges Tapestry, Inc. can expect moving forward is stabilizing Capri’s Michael Kors brand, which has struggled in the wholesale channel, as pointed out by analysts during the presentation. Along with the Asian market, the men’s category and digital capabilities, Crevoiserat said she sees opportunity for the brand in direct sales channels.
“We could have a final destocking of channels that is quite brutal before [the new Tapestry brands] launch their turnaround in 2024,” Listra said.
Tapestry expects Capri to see revenue declines this year, followed by single-digit annual growth over the next three years.
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