Skims, Farfetch, and 3 takeaways from the Tapestry-Capri deal.
Hello GlamInvest readers 👋
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Now to this week’s newsletter.
In this post, I write about Tapestry’s acquisition, Farfetch’s reprioritization, and Skims’ whooping $4billion dollar valuation.
Tapestry acquires Capri to contend with… LVMH?
Tapestry (parent of Coach, Stuart Weitzman, and Kate Spade) recently announced acquisition of Capri Holdings (parent of Versace, Jimmy Choo, and Michael Kors). It’s a move that will consolidate two major luxury holdcos into one conglomerate under the Tapestry name, with over $12bn in annual revenue. But, are they really going head-to-head with LVMH?
The Tapestry-Capri deal will combine 6 brands under one umbrellaA couple of things I take away from this announcement.
It’s a big move, but not ‘LVMH-big’
While this is certainly a momentous move, reports comparing it to powerhouse LVMH are an exaggeration. To put things into perspective, LVMH reported annual revenue of $79 billion in 2022 (6x the combined revenue of Tapestry and Capri). It also boasts 75 iconic luxury brands across beauty, fashion, spirits, cosmetics, jewelry, and more. Tapestry and Capri, on the other hand, primarily operate in fashion.
The combined entity is still only a fraction of the size of LVMHGiven LVMH's scale, it's no surprise that its net margin beats that of Tapestry and/or Capri combined. LVMH's net margin is 18%, while Tapestry-Capri's is 12%. However, with the merger, we might expect some improvement to Tapestry's margin over time if the synergies the acquisition seeks can be achieved.
2. Tapestry is trying to double down in Asia, a significant and fast-growing market for luxury goods.
Here are a few stats I found to support this premise:
Revenue: According to annual reports, in 2022, Capri's revenue from Asia was €5.2 billion, while Tapestry's revenue from Asia was €1.9 billion. This means that Capri's revenue from Asia was more than 2.7 times that of Tapestry.
Market share: Estimates show that Capri has a market share of about 10% in the Asian luxury goods market, while Tapestry has a market share of about 3%. This means that Capri has more than 3 times the market share of Tapestry in Asia.
Brand strength: Capri has two brands that are particularly popular in Asia: Versace and Jimmy Choo. Versace is one of the most popular luxury brands in China, and Jimmy Choo is one of the most popular luxury footwear brands in Asia. Tapestry's portfolio does not have any brands that are as popular in these markets.
Distribution: Capri has a strong distribution network in Asia, with stores in major cities like Beijing, Shanghai, Tokyo, and Seoul. Tapestry has a smaller distribution network in Asia, with stores in fewer cities.
It’s also worth noting that the Asian luxury goods market is still reportedly growing rapidly and expected to grow by 10% in 2023, despite the slowdown of the pandemic.
3. The acquisition will be a challenge to integrate, but hopefully not too challenging.
Tapestry expects to achieve $200 million in synergies within three years of the closing of the acquisition. As is the case with most mergers and acquisitions (M&A), Tapestry and Capri Holdings are two very different companies, with different cultures and different ways of doing business. However, they both operate a conglomerate model where each brand has its own business, CEO, and separate operations, so ideally, they have much less to integrate than the traditional full scale integrations that other M&A deals typically require. The acquisition is expected to generate synergies through:
Economies of scale: Both companies heavily index on leather goods, so there is potential for cost savings by combining operations.
Increased brand awareness: Capri has a much stronger foothold in Asian markets, where Tapestry could benefit from increased exposure.
Cross-selling opportunities: Capri's portfolio is arguably higher-end than Tapestry's, which provides Tapestry an opportunity to capture new customer segments and vice versa.
Tapestry's ability to achieve these synergies will hinge on its ability to successfully merge the cultures of both companies. This will require a delicate balancing act, as Tapestry will need to preserve the best of both cultures while also creating a new, unified culture that is conducive to growth and innovation.
Other GlamInvest news picks
Farfetch is learning the value of focus - shuts down its beauty division.
Farfetch is learning the power of laser focus and leaning on its strengths. Its primary model is hinged on retailing luxury items curated from boutiques all over the world. This means that a fashion shopper has access to a global inventory pool, where the size or design available to them is not limited by where they live, unlike many other retailers. However, it appears that this does not translate as well to beauty, where product specifications are not as variable and shelf life management is crucial. FarFetch shedding this arm should ideally free up their resources to focus on what they do best - curate luxury fashion from international boutiques.
Skims is valued at $4billion - CEO hints at future IPO.
Kim Kardashian started her brand Skims only 4 years ago, and it quickly took the industry by storm with its classic, evergreen silhouettes and a waitlist strategy that minimizes waste and generates more data on what customers want. Additionally, Kim's star power allows Skims to win in the direct-to-consumer (D2C) space by keeping a large portion of its margins, which can be as high as 70% when stocked with traditional retailers. I imagine their cash flow must be extremely healthy relative to other fashion labels in the space. They reported $500 million in revenue in 2022 and are on track to achieve $700 million in 2023, a 50% year-on-year growth that is enormous for a company of this scale! They are basically printing money. Their CEO has also hinted at a possible IPO in the future. It will be interesting to see how, or whether, the public image of its founder will at all impact the stock price, given how often her other endeavors make headlines. Skims is definitely a brand to watch.
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Warmly,
Sola
