Tapestry stalled

Tapestry remains committed to creating an American version of LVMH or Kering, despite facing obstacles from the Federal Trade Commission (FTC). The Company refuses to back down and is determined to prevail in the dispute. The lawsuit filed by the US antitrust agency against its acquisition of Capri Holdings “makes no sense”.

In a document filed in court in New York last Tuesday, Tapestry—the parent company of Coach, Stuart Weitzman, and Kate Spade—reaffirmed its intention to move forward with the deal. Yesterday, during the announcement of its third-quarter 2024 financial results, the Company reiterated its intention to “finalize the transaction within the calendar year”. This timeline aligns with statements from Judge Jennifer Rochon during the Monday hearing at the Manhattan federal court, where she stated, “I will ensure the case moves quickly”.

The hearing on the FTC’s attempt to block the 8.5-billion-dollar deal (equivalent to 7.92 billion euros at today’s exchange rate), announced last August, has been set for September 9. According to the FTC, the deal would create a “giant” in the “accessible luxury” handbag market, combining Coach, Kate Spade, and Michael Kors, effectively overpowering other competitors.

According to Bloomberg, the judge expects the preliminary injunction hearing to last about a week and a half. If granted, it would prevent Tapestry and Capri Holdings—the parent company of Michael Kors, Versace, and Jimmy Choo—from merging until the FTC’s internal tribunal can determine whether the deal violates antitrust laws. The regulatory authority claims that if the acquisition goes through, “consumers would lose the advantages of direct competition in pricing, discounts, promotions, innovation, design, and marketing”.

The costs associated with the deal, along with a general downturn in consumer spending, led Tapestry to close the third quarter with lackluster results, though they exceeded expectations. Net sales declined by 2% year-on-year, dropping from 1.51 billion to 1.48 billion dollars (approximately 1.37 billion euros). For the first nine months of the fiscal year, revenue remained relatively stable at 5.08 billion dollars (4.73 billion euros), a slight increase from 5.04 billion dollars in the same period of the previous fiscal year. Quarterly gross profit increased to 1.10 billion dollars (1.02 billion euros), with a gross margin of 74.7%, benefiting from a 100-basis-point reduction in transportation costs, favorable currency exchange effects, and operational improvements. Operating profit fell to 204.3 million dollars (about 190.4 million euros), with a margin of 13.8%. Net income dropped from 187 million to 139 million dollars, or 0.6 dollars per share (129.5 million euros, or 0.55 euros per share).

In the first nine months, net profit declined from 711.9 million to 656.7 million dollars (612 million euros). Despite the downturn, the board declared a quarterly cash dividend of 0.35 dollars (0.32 euros) per share, payable on June 24 to shareholders of record by June 7. Tapestry plans to distribute about 325 million dollars (302.8 million euros) in dividends for the fiscal year. However, Tapestry’s stock dropped by as much as 4% on Wall Street in pre-market and early trading after the Company revised its end-of-year forecasts downward. The management now anticipates revenues of over 6.6 billion dollars (6.15 billion euros), indicating a growth rate of about 1% year-on-year, which is below the consensus estimate of 6.74 billion dollars.

Additionally, expected earnings per share (EPS) are anticipated to range from 4.2 to 4.25 dollars (3.91-3.96 euros), which aligns with the consensus estimate of 4.22 dollars. However, the stock quickly recovered and returned to positive territory. On a separate note, regarding the acquisition of Capri Holdings, which has already received approval from EU and Japanese antitrust authorities, Tapestry remains “confident in the merits and the pro-competitive, consumer-friendly nature of this transaction,” indicating its intention to “move quickly to finalize the deal within the 2024 calendar year”.

In the court filing, Tapestry provided a comprehensive response to the FTC’s objections, presenting itself as a potential savior for Michael Kors, which has seen its sales drop since last summer’s announcement. “The attempt to block the revitalization of a once-iconic American brand does not make sense,” the Group declared, suggesting that the FTC’s perspective on the market is “unrealistic” and “based on a view of consumers as vulnerable, with limited choices, who care about fashion but are not willing to pay for it”. Tapestry highlighted that there are over 150 competing handbag brands, naming Alexander Wang, Alexis Bittar, and  Zadig  & Voltaire as examples.

“There is no handbag consumer who cannot easily switch from one brand to another, across all price ranges,” Tapestry argued. “In any properly defined market, Coach, Kate Spade, and Michael Kors together would account for less than 30% of sales, which does not suggest any probable harm in this highly dynamic and diverse industry,” the Company concluded. Tapestry is set to meet with the FTC virtually on Monday for oral arguments to present its case. (All rights reserved)