NEW YORK – The fashion week focus is usually on the runway but for Tapestry Inc. and Capri Holdings, it’s a federal courtroom in lower Manhattan, where their $8.5 billion deal hangs in the balance.
Tapestry, which owns Coach, Kate Spade and Stuart Weitzman, agreed to buy Capri, parent to Michael Kors, Versace and Jimmy Choo, just over a year ago, aiming to form an accessible luxury giant.
But a Federal Trade Commission challenge to that deal has put the future of both companies — and how regulators choose to enforce antitrust laws — front and center.
The hearing, which started Monday, will technically decide whether Judge Jennifer Rochon will grant the FTC a preliminary injunction, pausing the buyout while the antitrust case plays out.
But the result could be much more final than that sounds as the administrative proceedings in the case would most likely outlast the contract governing the deal, letting the parties walk away before the court has its final say.
Tapestry chief executive officer Joanne Crevoiserat sat in the front as the hearing opened and is expected to testify later in the hearing. (She was there in the morning and then left, presumably to head to Coach’s runway show later that day.)
But first up on the witness stand was John Idol, CEO of Capri Holdings, who made clear the struggling Michael Kors brand and Capri, which is itself in a kind of holding pattern pending the deal’s closure, can’t afford to wait for the case to wind through the legal system.
John Idol
Courtesy Photo
While Capri was negotiating the blockbuster buyout, it referred to the transaction by the internal codename “Project Sunrise,” and indeed the hope seems to have been the deal would help create a new day for Michael Kors, the base Capri was built on.
Investors are watching the case closely. Shares of Capri rose 5.1 percent to $36.55 on Monday, although that is still well below the $57 a share investors will get if the deal goes through. The government made sure to point out that Idol also has a lot on the line, specifically a roughly $210 million payout on stock he and his family hold should the deal go through. Tapestry shares also rose, by 2.3 percent, to $41.29.
Idol became CEO of Michael Kors in 2003 when it was a struggling designer brand with $17 million in revenues.
Under Idol, the business rocketed up to $4.7 billion in 2016, a time when he testified Monday that he would leave his New York office and maybe one in seven women on the street would be carrying a Michael Kors bag.
But sales at Michael Kors slumped to $3.5 billion last year and Idol said that now when he walks out of his office he sees “one in 200” women carrying one of the brand’s bags, “if we’re lucky.”
“We’ve worked very hard to get the brand heat back into Michael Kors,” said Idol, who acknowledged the company has not been successful doing that so far.
Idol attributed the decline to competition, underscoring a key point in Tapestry and Capri’s case, which generally argues there are plenty of other players in the space and that Coach and Michael Kors have to fight for every dollar of market share.
Elle Fanning in a shot from Coach’s “Unlock Your Courage” campaign.
Elaine Constantine
“The pie started to get split between a lot of people,” Idol said. “We’re getting squeezed from the top and from the bottom. Everybody wants a piece of the handbag market.”
Idol said the luxury players that Michael Kors took market share away from turned around and started to take it back.
“We believe that we compete in the total handbag market,” he said.
But the U.S. government has a much different take on that market and the transaction.
The FTC highlighted the consumer and how giving Tapestry too much sway over the accessible luxury market could hurt shoppers.
Nicole Lindquist, who presented the FTC’s opening arguments, said Coach, Kate Spade and Michael Kors accounted for more than half of the accessible luxury handbag market in the U.S., while competitors like Tory Burch or Polo Ralph Lauren “don’t hold a candle to these giants” in the category.
“This case is about the working and middle class American woman,” Lindquist said. “These women go to the outlet or Macy’s looking for their favorite American brand. She’s looking for something nice…that’s not going to break the bank.”
Half of the consumers buying Coach and Michael Kors bags come from households with annual incomes of less than $70,000, she said.
“When the biggest, closest competitors merge, that’s bad for American consumers,” she said.
And the government played up just how closely the two compete.
The case, which started in April, has produced more than 4 million documents and Lindquist, to help underscore her points, read several internal emails in court, pulling back the curtain on how top executives conduct business privately.
Idol, for instance, is a close reader of the email alerts Coach sends out to consumers and seems to regularly forward them to colleagues with notes or instructions.
To one promotional email from Coach offering discounts, Idol added to a colleague: “We need to develop a strategy to compete with this. I don’t love it, but we have no choice.”
In another email, Idol contrasted Coach’s pitch to the consumer with Michael Kors’ own email marketing.
“Sorry, our backgrounds look cheap and uninspiring. This needs to be corrected immediately. Help fast!” the CEO wrote.
The case is novel in that it seeks to block a deal, not to protect a broad market like grocery stores, as is the case with Kroger’s proposed acquisition of Albertsons Cos., or even the larger categories of fashion or accessories.
In a first for the fashion industry, the FTC is arguing that the deal would allow Tapestry to dominate the much-more focused area of accessible luxury handbags, the exact definition of which remains somewhat nebulous.
Lindquist said accessible luxury handbags start at $100 and only rarely approach $1,000.
Tapestry, in its opening statement, delivered by Lawrence Buterman of Latham & Watkins, sought to chip away at the government’s definition of the segment, which he said also specifies that the bags are “typically” leather, “typically” higher quality and “typically” sold to consumers with household incomes of $75,000 to $80,000.
Buterman described it as an “exercise of gerrymandering.”
He also said that it’s a price that, currently, Michael Kors doesn’t fit into as the average out-the-door price of the brand’s handbags was only $92 last year.
Additionally, Buterman said the government relied on data from Circana, the former NPD Group, and its reading of the contemporary and bridge markets, which exclude resale, direct-to-consumer brands and certain retailers, including off-price giant TJX Cos. Inc.
With both sides getting 20 hours each to argue their cases and a long list of top industry executives, including Michael Kors, expected to appear in person or via video deposition, there’s plenty more time to get at the true meaning of accessible luxury.
