The U.S. District Court in the Southern District of New York just blocked the acquisition of Capri Holdings by Tapestry in a suit brought by the Federal Trade Commission (FTC) against the $8.5 billion deal.
Judge Jennifer Rochon sided with the FTC in its allegations that Tapestry’s Coach and Kate Spade brands combined with Capri’s Michael Kors would give Tapestry a dominant share in the “accessible luxury” handbag market.
Tapestry immediately fired back claiming that the decision is “incorrect on the law and the facts” and announced plans to appeal the ruling. Tapestry claims the proposed merger is both pro-competitive and pro-consumer.
Tapestry has to act fast since there is a February 2025 deadline for the expiration of the bonds intended for the transaction, reported TD Cowen’s Oliver Chen in a research update.
“We do not see a high likelihood of Tapestry and Capri’s intended appeal being granted as the appeal would need to argue that the judge’s decision was incorrect in fact or law, which is not a small feat,” he wrote.
FTC Takes A Victory Lap
The FTC claimed in a statement that the merger would deprive American consumers from the “benefits of Tapestry and Capri’s head-to-head competition, which includes competition on price, discounts and promotions, innovation, design, marketing, and advertising.”
It also took issue with potential negative effects on the over 30,000 employees impacted by the merger.
The director of the FTC’ Bureau of Competition Henry Liu said, “With the goal to become a serial acquirer, Tapestry seeks to acquire Capri to further entrench its stronghold in the fashion industry.
“This deal threatens to deprive consumers of the competition for affordable handbags, while hourly workers stand to lose the benefits of higher wages and more favorable workplace conditions.”
No Serial Acquirers Allowed
Effectively, the FTC took issue with Tapestry’s intent to be a serial acquirer – a business strategy proven by Europe’s luxury conglomerates including LVMH, Kering and Richemont. The decision seriously hampers Tapestry’s ability to compete in the increasingly global luxury market.
Besides Michael Kors, Capri also owns luxury brands Versace founded in Italy and London-based Jimmy Choo so Tapestry loses broader access to the global luxury market where just over one-third of its $6.7 billion were made in fiscal 2024.
On the other hand, Capri generates just nearly half of its $5.2 billion revenues internationally with two-thirds of Versace’s $1 billion and 72% of Jimmy Choo’s $618 million made overseas. By contrast, Michael Kors does only 35% of its $3.5 billion in sales globally.
Chen notes that this decision could have “sweeping implications” for any other deals that could potentially threaten direct head-to-head competition. “This decision sets meaningful precedent for anti-trust cases going forward across industries.”
Bloomberg Law reported that the Biden Administration’s FTC and Justice Department antitrust division set a record for merger enforcement activity in 2022, totaling 24 and 26 respectively, according to the latest numbers available. The combined 50 merger challenges are the highest since the government required pre-merge antitrust review in 1976.
Perhaps Tapestry will wait to see how the next election unfolds to pursue other acquisitions since the timing of this one is unfortunate, considering the agreement deadline and the possibility of being sued by Capri.
Chen sees Tapestry pursuing potential acquisitions in outerwear, jewelry or beauty and wellness that would be less likely to raise the FTC’s hackles.
“This deal isn’t likely to be Tapestry’s last, as the acquisition of Capri will give Tapestry additional leverage to make even more acquisitions in the future,” the FTC stated.
‘Accessible Luxury’ Definition Vague
The facts which guided the court’s decision were based on the FTC’s expert witness Dr. Loren Smith and his analysis of competition in the “accessible luxury” handbag market defined as bags priced from $100 to $1,000 dollars.
Tapestry argued that there is no recognized accessible luxury market and that what’s accessible for one consumer may be inaccessible for another. In addition, its proposed three handbag brands – Coach, Kate Spade and Michael Kors – hardly would control the market when consumers can choose among hundreds of brands and price points.
In addition, industry insiders were skeptical of Smith’s analysis, based on third-party NPD data from 2021 that is both outdated and did not cover the full scope of the handbag market at all price points. It excluded data from many retailers, direct-to-consumer brand and liquidators. NPD is now part of Circana.
Chen pointed out that Dr. Smith’s analysis did not “pass the natural experiment test (i.e. not all ‘lost’ Michael Kors sales were captured by Coach.)”
In the ruling, the court found that the merger would give Tapestry a 59% market share in the accessible luxury handbag market, well over FTC’s threshold of 30% when the “presumption of anticompetitive effects” kicks in.
That 59% market share seems a stretch. Yes, Coach, Kate Spade and Michael Kors are big, but that big?
Coach generated $5.1 billion and Kate Spade $1.3 billion last year, but the company doesn’t report brand sales in the U.S. market. Michael Kors made $2.3 billion in the U.S. Further, none of the companies report handbag sales alone. They also offer a wide-range of fashion and other accessories.
For context, Americans spent $45 billion on luggage and similar products (i.e. handbags) last year, according to the Bureau of Economic Analysis.
A Better ‘Michael Kors’ Will Benefit Consumers
Testifying in the eight-day trial, designer Michael Kors said the brand had reached the “point of brand fatigue” and the numbers prove it. The Michael Kors brand lost $766 million in U.S. sales from fiscal 2019 to 2024.
One of the key motivations for the merger is for Tapestry and its team led by Joanne Crevoiserat to revive the brand and make it hot again. She joined the company in 2019 and was quickly appointed CEO in August 2020. Since then, Tapestry revenues have grown by 11%, up from $6 billion to $6.7 billion.
Stepping up the design quotient of Michael Kors, making it more desirable, modern and relevant, would not only benefit consumers, but also help “raise the tide that lifts all boats” across the entire handbag industry.
Anti-Business Versus Pro-Consumer
Before the start of the trial, GlobalData retail analyst Neil Saunders said the FTC giving the Tapestry-Capri deal more than a cursory look was “nothing short of ridiculous,” in a LinkedIn post.
Conceding that the Kroger and Albertsons merger warrants scrutiny, he believed this one in the highly discretionary category of handbags does not. In discretionary purchases, the market corrects itself if allowed to operate naturally with consumers deciding the winners and losers.
Saunders argued that there are “countless” stores and brands from which to buy handbags and that even if merged, Tapestry would “nowhere near dominate” the market.
In a post after the ruling, Saunders put a exclamation point on it:
“The blocking of Tapestry’s acquisition of Capri is absurd. It does not reflect the realities of the market. It treats highly discretionary goods like they’re some kind of essential commodity. And it shows a large degree of economic illiteracy.”
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