Joanne Crevoiserat, chief executive officer of Tapestry Inc., had her turn in the witness chair on Tuesday, parsing the competitive landscape and the nuances of the term “accessible luxury” with lawyers from the Federal Trade Commission.
The FTC sued in April to stop Coach-parent Tapestry’s $8.5 billion deal to buy Capri Holdings, charging that the buyout would create a handbag giant with too much sway over the accessible luxury market.
The hearing in Manhattan federal court is make or break for the deal. While Judge Jennifer Rochon will technically be determining whether or not to pause the deal with a preliminary injunction, such a delay would likely kill the transaction outright.
Investors have started feeling ever so slightly more bullish about the deal’s prospects as the hearing has continued. Shares of Capri rose 3.5 percent to $37.81 on Tuesday, but were still well below the $57 agreed on purchase price. Shares of Tapestry slipped 0.3 percent to $41.17.
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Day Two of the hearing included a frank assessment of the strength of Capri’s largest brand, Michael Kors, which was also preparing for its New York Fashion Week runway show Tuesday evening.
The State of Michael Kors
The hearing started on Monday with opening statements and testimony from John Idol, Capri’s CEO.
Idol said Michael Kors hit a peak in 2016, when sales reached $4.7 billion, and have since fallen back to $3.5 billion. While he said the company was working hard to bring “brand heat” back to Michael Kors, he said the company has not successfully done that so far.
Crevoiserat acknowledged Michael Kors’ difficulties. And when asked if it was a “strong” and “iconic” brand by a lawyer for the FTC, she replied, “Michael Kors is an iconic brand.”
Pressured to clarify if Michael Kors was a strong brand, Crevoiserat said, “The brand is iconic, execution has been — an opportunity, I would say.”
But she said Tapestry’s data-savvy approach, expertise and experience reinvigorating Coach could help build Michael Kors and Capri’s brands other brands, Versace and Jimmy Choo.
“They’re very big and distinctive brands,” the CEO said.
There has been significant speculation about which brands Tapestry would keep if the deal closes, but the portfolio seems set to change one way or the other as sources recently told WWD that Stuart Weitzman, the company’s smallest brand, is set to be sold off.
The Accessible Luxury Market
The government is arguing that by bringing Tapestry’s Coach and Kate Spade and Capri’s Michael Kors together under one roof, it would create a dominant force in the accessible luxury handbag market, where bags go for roughly $100 to $1,000.
Tapestry and Capri, however, have argued that this misreads the realities of the market, where customers shop high and low at same time and where the average out-the-door price of a Michael Kors bag last year was $92 anyway.
Crevoiserat said accessible luxury is “a term we’ve used with investors to describe how we compete” and not a turn of phrase used to court consumers.
Coach is credited with creating the notion of “accessible luxury” ahead of its 2000 IPO, which in turn set the stage for the company’s dramatic growth and subsequent acquisitions of Stuart Weitzman in 2015 and Kate Spade in 2017.
But the term is nebulous, although the case has shown that Tapestry used it — or some version of it — in internal documents, Crevoiserat said she doesn’t view the competition through the lens of “accessible luxury.”
“I don’t think anybody can agree on what it even means, so it would be a poor way to refer to a competitor,” she said.
The FTC, which is entering into new territory by stepping in and trying to protect such a narrow category in fashion, has argued that the deal would allow Tapestry to raise prices on its handbags by eliminating competition.
Crevoiserat described that argument as “ridiculous.”
“Customers have hundreds of choices, they can turn anywhere,” Crevoiserat said.
Instead, she said it was “brand heat” that powered full-price sales and that many other players are vying for handbag sales.
Pricing Power
Discovery in the case has produced some 4 million documents, including an internal Tapestry M&A analysis that showed that Coach products were priced $147 above Michael Kors bags online, indicating there was room for Micahel Kors to move higher.
The government pointed several times to the analysis, but Elizabeth Harris, Tapestry’s senior vice president of global strategy and consumer insights, said it was quickly thrown together by her staff and given little thought.
Instead, she said the report was meant to be an example of the kind of research and data points Tapestry could use as it considered whether to make a deal.
Harris said that simply buying Capri would not give it the pricing power necessary to raise Michael Kors’ prices.
“Pricing is an outcome of how you execute in the market,” she said.
The Handbag Competition
And Tapestry and Capri contend the market is a busy place.
“It’s an incredibly dynamic space,” Crevoiserat said. “Ralph Lauren is obviously a very well-known brand, but they are now expanding into handbags in a real way,” she said, when asked for examples.
She also cited brands like Veronica Beard, Kurt Geiger, Telfar and active giant Lululemon.
Crevoiserat said Lululemon has a “cross-body belt bag” that, according to one analyst report, now drives sales of more than $500 million.
“What pains me is even my daughter carries one,” Crevoiserat said, in one of the day’s lighter moments, where the CEO, dressed in a black suit, also wrestled with gigantic binders of legal exhibits, lit up when displaying two bags, one from Coach and the other from Kate Spade, to the court and joked that she could drum up some sales.
But mostly it was down to business.
Code Names
The trial has pulled back the curtain on some of the usually secretive dealmaking processes.
In his testimony on Monday, Idol said the deal’s internal code name was “Project Sunrise.”
Crevoiserat was more specific and added that was the name used for the process Tapestry created to map out its options.
In that process, Tapestry considered buying a high-growth brand that led its category, buying scale or just focusing on organic growth and bypassing any dealmaking.
The company ultimately went for scale and cut the megadeal with Capri, which internally was code-named “Comet.”
Tapestry looked for a Sunrise and found a Comet. Now it just has to hold onto it.
The hearing is expected to run into next week.
