Company Reports

Capri has agreed to be sold to narrow-moat Tapestry for $57 per share. The US Federal Trade Commission is blocking the deal on antitrust concerns. However, as we believe that Tapestry and Capri will be successful in court and that the deal will eventually happen, we have set our valuation to the acquisition price.

No-moat Capri continued its unsightly streak of sales declines and weak profitability in fiscal 2025’s first quarter. As has been the case since its acquisition by narrow-moat Tapestry was announced last August, Capri did not hold an earnings call or provide guidance. In its limited commentary, the firm blamed its weak results on soft demand for luxury fashion goods. While others in the luxury space have also noted subpar demand, Capri seems to be underperforming its peers.

Capri has agreed to be sold to narrow-moat Tapestry for $57 per share, but the US Federal Trade Commission has blocked the deal on antitrust concerns. We believe that Tapestry and Capri remain motivated to close the acquisition and that it will eventually happen, but the government’s action adds considerable risk that it will not.

No-moat Capri posted poor results in its (March-ended) fiscal 2024 fourth quarter as Michael Kors' sales dropped 10%. Capri's results have weakened since its acquisition by narrow-moat Tapestry was announced last August, but we still believe that Tapestry's management sees high potential for Capri's brands and wants to close the deal. Our base-case scenario remains that Tapestry and Capri will oppose the US Federal Trade Commission's block in court, ultimately prevail, and complete the acquisition at the agreed-upon price of $57 per share. However, we acknowledge there is some uncertainty, because the FTC can make a case that the deal reduces competition in a slice of the US handbag market.

The US Federal Trade Commission is challenging narrow-moat Tapestry’s acquisition of no-moat Capri on antitrust concerns. In its complaint, the FTC cites the direct competition between Coach, Kate Spade, and Michael Kors in handbags. We had anticipated that this aspect of the merger would be a problem as these brands are among the largest in the affordable part of the luxury handbag market. In addition, the FTC has concerns regarding employment losses and lower wages in the apparel and accessories space and Tapestry’s possible pursuit of further acquisitions. In response, both Tapestry and Capri issued statements to dispute the FTC’s claims and affirm their intention to close the deal. Unfortunately, the FTC’s position seemingly leaves little room for negotiation, which likely means a long delay until a trial.

Capri has agreed to be sold to narrow-moat Tapestry for $57 per share. Although held up by regulatory review, we expect this deal to close in calendar 2024.

Capri reported third-quarter fiscal 2024 sales and earnings that fell short of our expectations. The firm is not holding earnings calls or providing guidance as it awaits its sale to Tapestry. Although Capri’s recent results have been disappointing, we think the deal will close in 2024 at the original terms and therefore, we hold our fair value estimate at $57 per share. We view Capri’s shares as attractive at the current discount of about 18% to this price. Separately, we rate Tapestry’s shares as undervalued in relation to our $60 fair value estimate, which is based on a postmerger model. Led by Coach’s 6% sales growth, Tapestry surpassed our expectations in its end-December quarter.

Capri has agreed to be sold to narrow-moat Tapestry for $57 per share. We expect this deal to close in calendar 2024.

Capri’s results in its (September-ended) fiscal 2024 second quarter missed our expectations. The company no longer holds earnings calls or provides guidance as it awaits the acquisition by Tapestry. We do not expect to change our fair value estimate on Capri’s shares from the $57 offer price as we expect the deal to close in calendar 2024. Capri trades at a midteens discount to the offer, which we think provides an attractive risk/reward proposition given the seemingly high probability that the acquisition closes. Our Tapestry model combines the two firms, but we continue to publish a standalone Capri model.

Capri has agreed to be sold to narrow-moat Tapestry for $57 per share. We expect this deal to close in calendar 2024.

Narrow-moat Tapestry’s results fell slightly short of our expectations in its June-ended fiscal 2023 fourth quarter, as its North America sales dropped 8%. In addition, the firm’s fiscal 2024 guidance for sales of nearly $6.9 billion and EPS of $4.10-$4.15 is shy of our preearnings-call respective estimates of $7.04 billion and $4.36. Tapestry’s report came one week after it announced that it will buy no-moat Capri, which reported a 10% decline in its quarterly sales, for $57 per share (see our previous notes). Despite an expected reduction in our fiscal 2024 estimates to incorporate Tapestry’s new guidance, we expect to lift our fair value estimate to about $60 from $57 as it is buying Capri at a discount to our valuation. We believe investors are underestimating the benefits of the deal and view Tapestry’s shares as attractive.

Capri published results for its (June-ended) first quarter of 2024 that were slightly better than its guidance and our forecast. As the company has agreed to be sold to Tapestry for $57 per share, it provided limited information on its results, did not hold an earnings call, and rescinded previous guidance. We anticipate that the sale of Capri will be completed at the offered price in calendar 2024, so we have adjusted our fair value estimate downward by 8% to $57 from $62. We view shares as fully valued on a risk-adjusted basis as upside to the takeover price is just 6% based on the Aug. 10 close.

Capri has agreed to be sold to narrow-moat Tapestry for $57 per share. We expect this deal to close in calendar 2024.

We view Capri's acquisition by Tapestry as an excellent result for Capri's shareholders given that the $57 per share deal price provides more than 50% upside from recent levels and is less than 10% shy of our $62 fair value estimate. We also think the deal makes strategic sense for Capri as we do not think it has a long-term competitive edge as a standalone company (hence our no-moat rating). Thus, as we expect the deal will close at the offered price, we intend to lower our fair value estimate on Capri to $57 per share.

Capri is led by Michael Kors (69% of fiscal 2023 sales), a major brand in the attractive midtier handbag market. However, we believe Kors lacks the brand strength to provide an economic moat for the company, rating poorly on the criteria that Morningstar uses to evaluate luxury brands, such as conspicuousness of consumption, pricing power, and control over distribution. Powered by store openings and retail expansion during 2010-15, Michael Kors became one of the largest American handbag producers in sales and units. However, its sales have declined from fiscal 2016's $4.7 billion peak due to markdowns at third-party retail, store closures, and weakness in some categories. While Capri has reduced distribution of the label to limit discounting of its bags, it now faces challenges such as slowing consumer spending on apparel and accessories, inflation, and lower wholesale orders.

No-moat Capri wrapped up fiscal 2023 with fourth-quarter sales and earnings that eclipsed previously lowered expectations. In February, the firm warned that wholesale orders would remain slow through fiscal 2024’s first half. While this still appears to be the case, its outlook for $5.7 billion in sales, a 16.5% operating margin, and about $6.40 in EPS in fiscal 2024 is little changed from three months ago. Thus, we do not expect to make any material change to our $60 per share fair value estimate and view shares as very undervalued.

Capri is led by Michael Kors (70% of fiscal 2022 sales), a major brand in the attractive midtier handbag market. However, we believe Kors lacks the brand strength to provide an economic moat for the company, rating poorly on the criteria that Morningstar uses to evaluate luxury brands, such as conspicuousness of consumption, pricing power, and control over distribution. Powered by store openings and retail expansion during 2010-15, Michael Kors became one of the largest American handbag producers in sales and units. However, its sales have declined from fiscal 2016's $4.7 billion peak due to markdowns at third-party retail, store closures, and weakness in some categories. While Capri has reduced distribution of the label to limit discounting of its bags, it now faces challenges such as high shipping costs, inflation, unfavorable currency movement, and virus-related store disruptions in China.

Capri’s holiday season lacked joy as profitability in its (December-ended) fiscal 2023 third quarter fell short of plan on disappointing sales and orders from the wholesale channel and impact from COVID-19 in mainland China (where sales dropped nearly 40%). Moreover, as these trends have continued, its guidance for both the current quarter and the next fiscal year is below our forecast. Specifically, the firm guided to EPS of $0.90-$0.95 and $6.40 for the fourth quarter and fiscal 2024, respectively, versus our estimates of $1.39 and $7.23. Given this disappointing outlook, we expect to reduce our per-share $63 fair value estimate by a mid-single-digit percentage. Even so, we now view Capri’s shares, trading at a high-single-digit P/E, as undervalued after a 24% plunge on the report. While we think the firm lacks the brand strength of some peers and rate it as no-moat, we believe it has strengths, including the favorable economics of Michael Kors handbags and the growth potential of Versace, one of the best-known luxury apparel brands.

Capri is led by Michael Kors, a major brand in the attractive midtier handbag market. However, we believe Kors lacks the brand strength to provide an economic moat for the company, rating poorly on the criteria that Morningstar uses to evaluate luxury brands, such as conspicuousness of consumption, pricing power, and control over distribution. Powered by store openings and retail expansion during 2010-15, Michael Kors became one of the largest American handbag producers in sales and units. However, its sales have declined from fiscal 2016's $4.7 billion peak due to markdowns at third-party retail, store closures, and weakness in some categories. While Capri has reduced distribution of the label to limit discounting of its bags, it now faces challenges such as high shipping costs, inflation, unfavorable currency movement, and virus-related store disruptions in China.

Overcoming a challenging market, no-moat Capri beat our expectations in its fiscal 2023 second quarter. Although its shares dropped by a mid-single-digit percentage on a more conservative outlook for the rest of the fiscal year due to a softer economy, virus-related restrictions in China, and the impact of the U.S. dollar’s appreciation, it appears to be navigating the macroeconomic conditions better than most. Indeed, while Capri’s guidance for fiscal 2023 sales growth of about 1% is below our 4% estimate, its adjusted operating margin and EPS expectations of 18.3% and $6.85, respectively, exceed our 17.9% and $6.81 projections. Thus, we do not expect to change our $63 fair value estimate and continue to view Capri as undervalued. Although inflation is affecting consumer spending on apparel and accessories, we believe the firm has been boosted by its pricing and product initiatives, and that firms (like Capri) that cater to higher-income consumers are outperforming peers.