Updated at 5:09 p.m. EST
Tapestry Inc. and Capri Holdings are officially going their own way.
The two companies agreed to terminate their merger agreement, which has Tapestry now looking to push organic growth and buying back stock while Capri has entered into full turnaround mode.
John Idol, chairman and chief executive officer of Capri, was clear-eyed about how much work needs to be done on a conference call with analysts on Thursday, the company’s first touch base with Wall Street since the deal was signed in August 2023.
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Idol acknowledged missteps at both Michael Kors and Versace and sketched out plans to revive the businesses, which will be expanded on with an in-depth strategy presentation to investors in February.
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While the CEO stressed Capri has the resources to follow through on its strategies — “We have a very solid balance sheet and we still are generating significant free cash flow” — he also kept the door open to some additional dealmaking.
“If we do see any opportunity that would create additional shareholder value, we will certainly look at that very carefully,” Idol said.
Since the deal was paused with a preliminary injunction last month, analysts have openly speculated that Versace and Jimmy Choo could be sold while Michael Kors could be taken private.
Investors took heart and traded shares of Capri up 4.4 percent to $20.52 — a far cry from the $57 Tapestry agreed to pay for the company in what turns out to have been much better times.
Capri did get a kind of parting gift from the failed agreement. The company said in a regulatory filing that Tapestry agreed to reimburse it with approximately $45 million in cash.
Still, this is not the way things were supposed to go.
When Tapestry agreed to buy Capri at an enterprise value of $8.5 billion, it planned to use the turnaround plan that revitalized Coach and is still being applied at Kate Spade on the Michael Kors business.
But the prospect of having all those accessible luxury handbag brands under one roof drew the Federal Trade Commission, which sued to stop the buyout on antitrust grounds in April. Technically the deal was just paused pending a full trial, but that process would not wrap up before the Feb. 10 expiration of the merger contract.
The government argued — it turns out successfully — that once the deal closed, Tapestry would have enough clout in the market to unilaterally raise prices on accessible luxury handbags, hurting customers to the tune of $365 million annually.
Idol and other industry experts argued against the case in court, saying that it ignored market realities in the competitive handbag business and that even a very big company couldn’t raise prices on consumers without giving them more value.
It turns out that efforts to move Michael Kors and Versace to higher price points and delays tied to the pending Tapestry deal were a big part of what has tripped up Capri.
“Externally, consumer demand for fashion luxury goods has softened globally with an outsized decline in China,” Idol said. “Internally, due to the merger, we did not place as much of an emphasis on our long-term planning. At the same time, we made a number of missteps in our efforts to reposition our brands, in particular at Michael Kors and Versace.”
Capri’s revenues fell 14.8 percent to $2.1 billion in the first half, with Michael Kors down 15.2 percent to $1.4 billion and Versace down 22.1 percent to $420 million. Jimmy Choo held up relatively well, off just 0.6 percent at $313 million.
Troubles at Michael Kors
At Michael Kors, Idol said the company “attempted to elevate price points too quickly over the last two years” while reducing its signature product offering and “injecting too much fashion for our core consumer.”
The result was that deeper price promotions were needed to drive sales.
To fix that, Michael Kors will now be looking to rev up its marketing while rebuilding its core and signature assortments and tightening up the 755-door store fleet. Michael Kors plans to cut about 75 locations over the next couple years.
Seventy-five to 80 percent of the company’s capital expenditures are going to go toward getting Michael Kors into the right place.
Stumbles While Elevating Versace
At Versace, Idol said the company moved too fast as it sought to push the brand higher.
“We tried to elevate the brand very quickly, and we really did not have enough breadth of assortment at price points that really are more aspirational,” the CEO said.
“We’ve obviously elevated the brand. We’ve made it much more sophisticated than it was previously,” he said. “On the other hand, where we lost the most significant amount of our business, both in our own channel and in the wholesale channel, was the aspirational customer.”
It didn’t help that the changes hit during a global luxury slowdown.
Now the brand is adjusting course.
“We are focused on injecting more energy into Versace’s assortments to achieve the ideal balance of fun and elegant style,” Idol said. “We are also strategically adjusting our assortments to appeal to a broader consumer.”
Tapestry’s Change in Tack
For its part, Tapestry said it would look to drive its organic growth and added $2 billion to its share repurchase plan.
Joanne Crevoiserat, CEO of Tapestry, said: “We have always had multiple paths to growth and our decision today clarifies the forward strategy. Building on our successful first quarter, we will move with speed and boldness to accelerate growth for our organic business. Tapestry remains in a position of strength, with distinctive brands, an agile platform, passionate teams and robust cash flow. We have significant runway ahead and are pleased to announce today an additional shareholder return program, as we believe there is no better investment at this time than our own stock.”
Tapestry is also redeeming $6.1 billion in debt it took on to close the Capri deal.
While it was a costly, distracting and ultimately failed effort to reshape the industry with a mega buyout, Tapestry’s shareholders seemed to be breathing a sigh of relief.
Shares of the company rose 12.8 percent to $57.82 on word that the merger was terminated.