GIL:CC - From Coach to first class: Tapestry's Capri buy gets (mostly) high-fives

2023-08-10 14:01:05 ET

Tapestry ( NYSE: TPR )’s purchase of Capri Holdings Limited ( NYSE: CPRI ) drew mixed, though largely positive reviews, and flies in the face of Amazon’s recent move to cut private-label brands.

The $8.5B deal for the owner of Coach to buy the owner of Michael Kors positions it to own the affordable luxe handbag market in the U.S., Wells Fargo said. TPR also gets the Versace brand, aiming straight at the high-end behemoth that is LVMH Moët Hennessy ( OTCPK:LVMHF ).

Jefferies and BMO Capital Markets called the move a “surprise” while Wells Fargo sees TPR going “from Coach to first class.”

The transaction unites six brands with significant geographic and consumer reach, Wells Fargo said.

The all-cash deal comes as Tapestry ( TPR ) has seen sales and profit stagnate over the past several quarters. LVMHF, on the other hand, has seen steady growth in profit and sales, while AMZN is being motivated to cut costs.

TPR reported total revenue of $6.6B for the past 12 months to CPRI’s $5.62B. Even combined, that’s a fraction of Kering SA’s ( OTCPK:PPRUF ) $22B and LVHMF’s $92.4B.

Under the terms of the transaction Capri Holdings shareholders will receive $57 per share. The stock is up some 56% today to around $54.

Analysts opine

On the downside, Jefferies noted that while good for CPRI shareholders, the benefits to TPR may be limited.

"We view the deal as positive for Capri shareholders, but are surprised Tapestry would want to acquire the co. given existing brand similarities, momentum with current strategy, and potential execution issues," Jefferies analyst Ashley Helgans said in a client note.

Wells Fargo’s Ike Boruchow and Will Gaertner have Overweight ratings on both CPRI and TPR.

“The deal is obviously transformational for TPR and reshapes the landscape of the handbag space, particularly in the U.S.” the analysts wrote in a note.

“The addition of Michael Kors cements TPR as the number one player in the accessible luxury handbag market in the U.S. by a wide margin. Further, the addition of Versace (and to a lesser extent Jimmy Choo) add luxury assets to TPR's portfolio that will help them better compete with European luxury houses such as Kering ( OTCPK:PPRUF ) and LVMH ( OTCPK:LVMHF ).”

Meanwhile, BofA reiterated its Buy rating on TPR.

“TPR’s track record of acquisitions has been mixed, with Kate Spade taking longer than expected to hit its targets and Stuart Weitzman still struggling,” BofA analysts Lorraine Hutchinson and Melanie Nuñez wrote in a note.

However, "this is a new management team with more integration experience, so we view success here as more likely."

BofA notes that TPR expects immediate double-digit earnings accretion.

“This transaction changes the TPR narrative from slow but steady growth with great cash flow to a turnaround,” the analysts wrote. “This adds risk, but we think the valuation is compelling and see many opportunities to improve Kors’ distribution.”

Amazon, on the other hand

Amazon, on the other hand, is cutting private label brands.

Matt Taddy, vice president of Amazon Private Brands, said in a statement to CNBC that the company is planning to eliminate in-house products after determining they didn’t resonate with customers.

Chief Executive Officer Andy Jassy has been trimming costs across the company, laying off 27,000 people and freezing corporate hiring.

Amazon also may be facing an antitrust lawsuit from the Federal Trade Commission after third-party sellers raised concerns that Amazon improperly accessed merchant data to develop their own products.

Brands have accused Amazon of copying their products and pricing them at levels that make it difficult to compete, CNBC reported.

Across the universe

Luxury retailers traded higher on Thursday after the news of the acquisition, including Compagnie Financière Richemont SA ( OTCPK:CFRHF ), Burberry Group plc ( OTCPK:BURBY ), The Swatch Group ( OTCPK:SWGAY ), Hermès International Société ( OTCPK:HESAF ), Hugo Boss AG ( OTCPK:BOSSY ), Christian Dior SE ( OTCPK:CHDRF ) Canada Goose Holdings ( GOOS ), PVH Corp. ( PVH ), V.F. Corporation ( VFC ), Gildan Activewear ( GIL ) and Movado Group ( MOV ).

The Tema Luxury ETF ( LUX ) rose 1.9% today, while the S&P Global Luxury Index Net Total Return ( SPGLGUN ) was up 1.7% .

TPR is up 5.2% in the past 12 months and down 15% today. CPRI is up 11% over the past 12 months.

More on luxe stocks:

• Tapestry confirms $8.5B deal to acquire Capri Holdings
• Coach owner Tapestry in talks to buy Capri Holdings - WSJ
• LVMH's U.S. consumer pullback could reverberate across luxury brands

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