By Teresa Rivas
First it was discount airfare and groceries. Now it's luxury handbags.
The Federal Trade Commission's mandate is to protect consumers and competition, leading the government agency to prevent several high-profile mergers this year. In January it blocked the proposed JetBlue Airways- Spirit Airlines combination, in February it attempted to do the same for supermarkets Albertsons and Kroger, and on Monday it sued to halt Tapestry from buying Capri Holdings.
The rationale was the same in each case, with the FTC saying the mergers would reduce options for consumers and potentially lead to higher prices. Tapestry owns so-called affordable-luxury brands like Coach, Kate Spade, and Stewart Weitzman, which compete in the same space as Capri's Michael Kors and Jimmy Choo labels.
Tapestry and Capri pushed back, noting that there are other competitors in the space and the $8.5 billion deal would allow it greater ability to compete against luxury powerhouses like LVMH Moët Hennessy Louis Vuitton. Regulators in the European Union and Japan had already signed off on the merger.
However, while analysts covering JetBlue cheered the demise of the airline merger, both Tapestry and Capri shares ended the day lower after news broke of the FTC move against the widely anticipated deal.
For bargain hunters, Tapestry looks like the stock to scoop up.
At this point the market isn't optimistic the deal will happen, with Capri trading around $35, meaningfully below the $57 per-share acquisition price. If either company terminates the deal due to lack of regulatory approval, Tapestry will be on the hook for Capri's expenses, which could be as high as $50 million.
Bernstein analyst Aneesha Sherman pegs the deal's chances around 50% but raised her Tapestry price target by $2, to $48. That's because either way, there's "asymmetrical upside" for the stock, "with very limited impact if the deal closes, and around 40% upside if it breaks, with good fundamental long-term upside either way."
The average analyst price target is $50, implying a 25% upside from Tapestry's current $40.
Tapestry trades at just 8.8 times forward earnings, below its five-year average of 10 times. Sherman argues that if the deal goes belly-up, it could quickly return to that historical multiple, given that "Coach has proven itself to be resilient" in a tough environment.
Indeed, the higher cost of living has left many low-end luxury shoppers in the lurch. As LVMH noted in its recent earnings report, inflation has hit aspirational customers particularly hard, with the company expecting only gradual improvement in this segment of the market.
That makes Coach's better-than-expected performance more valuable. Consensus still calls for Tapestry's earnings per share to climb more than 9% in its fiscal year ending in late June.
That said, if the deal were to go through, TD Cowen analyst Oliver Chen says Capri's Michael Kors label "represents a meaningful opportunity" for Tapestry. "While the brand needs modernization and a renewed creative direction to drive heat, the cash flow and brand recognition alone provide an attractive investment position."
That could be some consolation for Capri shareholders if the deal fails, although Chen writes that the stock price could fall as low as the high teens if the acquisition is blocked -- and wouldn't be attractive even to long-term investors until it's in the $20 range.
That's a fraction of the cost of a Michael Kors handbag, which can retail for more than $2,000. The tough sales environment and the FTC's move could keep prices from going higher. Perhaps that's one way to keep luxury accessible.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 25, 2024 02:00 ET (06:00 GMT)
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