Can Michael Kors follow Coach's growth playbook?
After years of bringing Coach upmarket, targeting Gen Z and reducing its exposure to wholesale, Tapestry could apply the same strategy to the brand’s soon-to-be stablemate.
Published August 22, 2023
BY: Madelina Schulz
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Coach and Michael Kors will sit under one Tapestry umbrella pending approval of the New York-based conglomerate’s $8.5 billion acquisition of rival Capri, which is expected to close in 2024.
All going ahead, the two brands will stand as Tapestry’s multi-billion-dollar darlings (Coach’s fiscal year 2023 revenue was $4.9 billion, while Michael Kors saw $3.9 billion). But they’re in very different positions. In recent years, Coach has undergone a revamp, moving upmarket by tackling inventory and distribution problems and targeting Gen Z customers with sustainability and digital initiatives. CEO Joanne Crevoiserat highlighted both of these victories in Tapestry’s fourth-quarter earnings last week.
Michael Kors, meanwhile, has struggled in the same areas. For the first quarter of fiscal 2024, the brand’s revenues were down 13.8 per cent year-on-year. During Capri’s earnings call the quarter prior (for year-end fiscal 2023), Capri CEO John Idol said Michael Kors had seen the largest impact to wholesale in the group. Idol also said that Capri had been sequentially reducing inventories across the company post-Covid, and was looking to stabilise that business. “In terms of Michael Kors, this is a very painful thing that we’re going through with the reduction in the wholesale channel for us.”
It’s an opportunity for Tapestry, says TD Cowen managing director Oliver Chen — and one they wouldn’t have jumped on were they not confident in their ability to add value. “Their operation of Coach is a testament [to its capability], and this company is pretty disciplined and methodical in their approach,” he says. “But this all carries a fair degree of risk,” he cautions: Tapestry will need to tap the right talent to improve Kors’s track record in both product and store experience.
Analysts and investors will be watching. For many, a Michael Kors turnaround could make or break the impending merger. It’s a risky move, particularly as once the transaction closes the company will take on four times net debt EBITDA — a high debt rate, Javier Gonzalez Lastra, luxury portfolio manager at financial services firm Tema ETFs, told Vogue Business when the merger was announced.
Will Kors be able to replicate its new bedfellow’s success, under Tapestry’s guidance?
Neil Saunders, managing director and retail analyst at analytics firm GlobalData, flags that Tapestry has already managed to parlay its Coach strategy to its existing brands. “Tapestry has employed its Coach playbook at Kate Spade, gradually improving the brand’s image and traction in the market by reducing flash sales and putting more effort into design and quality,” he says. That said, as last week’s earnings showed, Spade is struggling to mimic Coach’s comeback; the brand’s fourth-quarter revenues were down 10 per cent year-on-year (Coach was up 3 per cent).
Plus, Saunders adds, Kors’s product variation could be another hurdle. “[Michael Kors] has a much wider presence across a whole host of categories and its position is way more confused than Coach’s ever was.”
It’s a difficult time for a turnaround, particularly in North America, says Jessica Ramirez, senior analyst at research firm Jane Hali & Associates. But Tapestry is poised for success. “We like that it was Tapestry who bought Capri, and not the other way around,” Ramirez says. “There’s a lot more strength to Tapestry — and a better track record than Michael Kors had before they became Capri.”
Both Tapestry and Capri declined to comment. During Tapestry’s Capri acquisition conference call, in response to Chen’s question about Michael Kors’s cultural relevance, Tapestry’s Crevoiserat said: “Michael Kors is a strong brand and it’s well-positioned in the market with strong consumer resonance and awareness ... We’ll work with the Michael Kors team to accelerate their view on modernising the jet set, luxury positioning and reaching out to consumers and driving engagement.”
“At Tapestry, we’re brand-builders, and having these six iconic brands is meaningful,” Crevoiserat said. “There’s a scarcity of true luxury brands in the market, and we’re going to nurture these brands and make sure we can accelerate the growth strategies they’re on.”
It’s all in the data: Inventory and distribution
In recent years, Coach has focused on driving higher inventory turnover and shifting distribution from wholesale to direct-to-consumer. There’s much to be learned from Coach’s retail playbook, analyst Ramirez says, in how to clearly run inventory and manage a business.
Experts highlight Coach’s customer data platform as an asset that Tapestry can execute at Capri. This year, Tapestry brought all of its brands onto a unified digital enterprise platform. “We feel fashion innovation and product excellence are informed by data analytics and consumer research,” Crevoiserat told investors last Thursday.
The Tapestry CEO also spoke about Coach’s ongoing inventory management efforts (also underpinned by its data analytics) to boost Coach growth — and, more recently, Kate Spade’s. She said: “It comes from really understanding our consumer; leveraging data across our value chain — all of the capabilities that we’ve built over the last few years and embedded in our decision-making in terms of our assortment size, cutting off the tail, our inventory management capabilities. [It is] critically important to make sure that those capabilities end up in the hands of decision makers and they drive action.”
At Tapestry, we’re brand-builders, and having these six iconic brands is meaningful.”
Ramirez notes that Michael Kors did make strides towards improving its inventory strategy during the pandemic. “They had the ability to reset their inventory in the DTC channel,” she says. “But they didn’t adjust their wholesale [strategy].”
This, Ramirez believes, is the largest distinguisher between Tapestry and Capri — the former has managed to mitigate Coach’s wholesale exposure in the US, meaning the brand’s performance is less dependent on market volatility. Michael Kors is aware of this limitation, and after a drop in wholesale demand severely impacted Capri’s third-quarter earnings, Idol said that Capri had begun to “better align operating expenses with the change in revenue by channel” and had started shipping less Michael Kors product to wholesalers as part of this strategy rethink.
Tapestry isn’t immune to this pullback — its latest earnings attest to this. But North America’s 2 per cent year-on-year decrease was a smaller drop than most.
A shift from wholesale means more investment in DTC — including physical stores. This is another area Kors needs to improve upon, analysts Ramirez and Chen agree. Michael Kors stores are in need of renovation and elevation, Chen says. During May’s fourth- quarter earnings call, Capri’s Idol said that the plan was to embark on a “a very significant store remodelling program for the Michael Kors brand”. Coach, meanwhile, is already embracing experiential retail. Over the weekend, Coach hosted ‘Loop Fest’ at its Soho, New York flagship, the third of a series of pop-ups for its Coachtopia sub-brand.
“It's not easy, but you need to intensify the emotional connection with the customer,” Chen says of Kors’s need to follow suit. “And that means being culturally relevant. It means reinterpreting what ‘jet set’ means; it means segmentation of outlet and full price.”
Teaming up: The international opportunity
It’s not a one-way street, Ramirez says, highlighting Michael Kors’s strong international network as a potential asset to Coach. One of Tapestry’s goals, as Crevoiserat highlighted during Thursday’s earnings, is to become more global. Whereas Tapestry currently has Coach-operated stores in 21 countries, Michael Kors has a standalone presence in 85.
Coach can lean on Kors’s international arc, Ramirez says, which is helpful to have when one region is excelling and another is flailing (see, for instance, the impact of US consumer pullback on company earnings this season).
In last week’s earnings, Tapestry also flagged China as a key market for growth, even if it doesn’t make up a large portion of the business. Chen says that Coach has made great progress in the country (and flagged Japan as another key Asia growth spot), and flags Michael Kors’s historical fashion relevance in the region. In March, Michael Kors hosted a ‘Jet Set’ experience in resort destination Sanya as a first step in its post-lockdown China revival. Following this, during Capri’s fourth-quarter earnings call for fiscal 2023, Idol identified Asia as the brand’s “largest growth opportunity”.
That the brands can band together to pursue overseas growth is a plus, Chen says
— especially because Europe is so competitive. “The expressive luxury category is really an American creation,” Chen says. “So, competing together is a stronger position for distribution and placement, and also the advertising spend with more scale is helpful.”