Louis Vuitton May Finally Get a US Challenge

(Bloomberg Opinion) -- When Coach owner Tapestry Inc. and Michael Kors parent Capri Holdings Ltd. began their individual acquisition sprees, each had an opportunity to become the US equivalent of LVMH.

Fast forward six years, and neither on its own has emulated the success of the world's biggest luxury group. But they have another chance to become a bling behemoth: Tapestry said on Thursday that it would acquire Capri for an enterprise value of $8.5 billion.

A combination creates a US luxury powerhouse with more than $12 billion of annual revenue and almost $2 billion of underlying operating profit. As well as namesake brands Coach and Michael Kors, Tapestry owns Kate Spade and shoemaker Stuart Weitzman, while Capri is also home to Versace and Jimmy Choo.  The enlarged company will also have a more global reach, with Capri's operations in Europe complementing Tapestry's presence in Asia.

The combined group would still be dwarfed by the European conglomerates — LVMH Moet Hennessy Louis Vuitton SE, Gucci-owner Kering SA and Cartier parent Cie Financiere Richemont SA. But they are be getting closer. And together, Tapestry and Capri would be better able to compete with the European names as well as domestic rivals such as Ralph Lauren Corp.

This is essential, because the last three years have seen a polarization between the biggest players and the rest of the industry. Scale means more funds to make brands stand out. The European giants have been able to invest in the best stores, the most high-profile marketing campaigns and increasingly celebrity designers. Cost savings can be hard to come by in luxury, but Tapestry said it expected to achieve more than $200 million of synergies within three years.  

What's more, after several years of blockbuster growth, luxury sales are starting to settle at a more normal level amid a slowdown in the US and signs that China's post-Covid return may not be as spectacular as hoped. Even the mighty LVMH had to invest more in the first half of its fiscal year to keep its labels at the forefront of consumers' minds; it splashed out on Pharrell Williams' inaugural fashion show for Louis Vuitton menswear in Paris.

Tapestry and Capri mostly operate in the riskier premium part of the market, not at the very top echelons of luxury. It's the younger and merely comfortable shoppers rather than super-wealthy who are beginning to pull back. The two companies are exposed to just these types of customers. 

A combination is not be without its challenges, of course.

Tapestry is offering $57 per share in cash for Capri,  a 65% premium to Wednesday's closing price. Although Capri stock has slumped nearly 50% since February, when the company cut its outlook for the year, that may not be enough to win over investors. The shares were trading as high as about $68 before the warning.  Meanwhile, at the proposed valuation, the acquisition multiple is 9 times trailing earnings before interest, tax, depreciation and amortization, well below the about 16 times implied by Kering's recent purchase of a 30% stake in Valentino. Capri shares rose almost 60% to about $55 in pre-market trading.

The weaker outlook was prompted by Capri's Michael Kors brand, which has suffered from years of overexposure, department store woes and appealing to customers who are feeling the pinch. These long-term problems will still need to be addressed. But Kors' issues may be better dealt with as part of a bigger group. Not only will it have more financial firepower, but Tapestry has a strong track record in reviving tired names. It has done a good job revitalizing its flagship brand Coach with more desirable products, effective marketing and high-profile collaborations with Selena Gomez and Jennifer Lopez.

Indeed, the risks of a deal are worth taking. If Tapestry and Capri can get it right, they can be a bigger force in global luxury. There might even be scope to bulk up further, for example, through a deal with Ralph Lauren if its founder ever decides to sell.

The US has always punched below its weight when it comes to luxury. With Tiffany becoming part of LVMH and speculation that Ralph Lauren might eventually follow, the two American names are at least trying to forge a path away from Paris.

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(Updates throughout with details of deal)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

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