Photo courtesy Tapestry and Capri Holdings

As a long-time Tapestry shareholder, I fully endorse the super-merger between Tapestry and Capri Holdings. Uniting these six iconic brands under one company is the closest thing the United States has to a luxury fashion house to rival the European powerhouses.

Minting a new conglomerate with hopefully a new name (I didn’t care for the Tapestry name) will create an underrated value company reinvigorated with unique growth potential. Larger, more diversified, more scale, and more reach. I like it.

Strengths of this deal:

• Using a sum-of-parts valuation, this newly merged company is valuable. Each brand must be valued separately and combined to reach an overall valuation.
• The brands under Capri are worth significantly more now under Tapestry’s leadership, growth strategy, and hyper-digital focus.
• Diversification of assets: Stronger presence in Asia (Michael Kors and Jimmy Choo) and European (Versace) luxury markets and less reliance on the United States.

Capri Holding has brands that attract more consumers to the higher-end of luxury. The appeal for investing in this company was its profit-margin potential. Tapestry does a better job in almost every way operationally: optimizing product inventory, personalizing the consumer experience, maximizing its revenue, etc. Tapestry didn’t have the exciting growth potential compared to Capri due to its lack of a higher-margin portfolio to attract wealthier consumers.

Now it does.

The brands under Capri are still strong. The brands need a refresh but are not distressed. The problem has been a reliance on its wholesale business and bad growth strategy. Tapestry has succeeded in reviving slumping brands like Coach with a DTC/e-commerce-focused model and can do a similar rehab project with Michael Kors. There is no reason for Kors to bring in less revenue ($3.9b) in the last four quarters than Coach ($4.9b) and Versace ($1.1b) to be lagging Kate Spade ($1.4b). Tapestry has a clear 2025 growth strategy to unlock the underperforming Capri brands.

The debt needed to create this merger is problematic; however, the two fashion houses combined are much more robust and resilient against a tough macro economy. Management can address this debt by aggressively slashing corporate headcount, closing underperforming stores, and reducing retail partnerships, which should be under 10%.

The biggest headline for this deal was how much of a coup this was for Tapestry getting Capri at a bargain price. Under the transaction terms, Capri Holdings shareholders will receive $57.00 per share in cash for a total enterprise value of approximately $8.5b. $57 represents a premium of 59% to where Capri was trading the day before August 10th. That sounds like an overpay, but Capri traded above $68 in February and above $70 in the middle of 2018. Typically, acquisitions exceed the company’s fair value price – see Figma or Twitter. If this deal happened during the post-pandemic rebound or even six months ago, Tapestry would likely have to pay anywhere from $9-17b to get a deal done.

The macro is a big reason Capri traded below its estimated fair value. The narrative was different just six months ago. As long as we do not enter into a recession, this is a good deal, and if retail rebounds, which it has historically done in the past, this is a steal. As a Tapestry shareholder, I am excited to see the catalysts ahead for the stock to finally appreciate over 100% in the next 2-4 years. Tapestry was doing well before the merger, and I am optimistic they can integrate six luxury fashion brands to optimize growth and value fully.