By  on January 3, 2018

First it was the handbag wars. Now the race is on in the U.S. to see who gets to build the better brand empire.Such is the shift in business model for both Tapestry Inc. and Michael Kors Holdings Ltd. The two made acquisitions last year and each firm is expected to continue foraging for brand additions to their growing stables in 2018. Of immediate concern is the integration of the new acquisitions, as well as the pay down of debt. That could suggest no deals for at least the first half of the year, and likely not even the third quarter. But since quality brands come up for sale infrequently, and sometimes the smaller deal presents greater growth opportunities, their current mind-set of waiting a bit could change should the right opportunity present itself.With an evolving model that now includes two acquisitions under its belt, the former Coach Inc. outgrew its monobrand moniker and transitioned to Tapestry Inc. in October. Its first acquisition was in 2015, paying $574 million for the Stuart Weitzman footwear brand. That was followed last year by the $2.4 billion deal for accessories competitor Kate Spade & Co. With Victor Luis heading up corporate, the company named Joshua Schulman president and ceo of the Coach brand in June. The brand itself has been undergoing a successful transformation as creative director Stuart Vevers has been working on the more design elevated, higher-end 1941 Collections line.Luis, chief executive officer of Tapestry, said at the time of the name change that the company had already been considering the move a few years ago after it acquired Weitzman. Going ahead with it was indicative of the firm’s shift in business model mind-set, and that it was serious about transforming into an American holding conglomerate of accessible luxury brands — each with its own platform, as well as distinctive personality and positioning in the marketplace.But in buying Kate Spade, Tapestry also signaled what it might be looking for in future deals. No surprise that high on the list is a brand that could take advantage of Tapestry’s now-extensive leather goods sourcing network on the backend.What the group can learn from additional acquisitions also seems to be high on the agenda. The company learned much about designing and producing footwear from Weitzman, and eventually took back the Coach footwear license to produce in-house. Kate Spade has a number of licenses that Tapestry is likely reviewing, and these eventually could serve as a roadmap for select Coach brand licenses.With the Kate Spade transaction, and given its aim to expand its portfolio, one can glean that Tapestry is likely looking at firms that can help further its new focus on lifestyle and modern luxury, as well as expand further into other regions.Luis told WWD in an interview after the Kate Spade deal was disclosed, “Lifestyle is perhaps one of the most important [factors] because it speaks to our vision for [Tapestry Inc.] and what our group of companies represent.”The ceo noted that also important is how the company defines modern luxury, adding that "how we define it for ourselves is about quality and great design, while at the same time offering the customer an emotional experience through great brands, its history and narratives. Modern for us is different from the traditional European groups. [For us] it’s about being inclusive, not exclusive based on price. It is not based on a country of origin, [nor] is it made in any specific market as traditional luxury brands are.”Given that great premium brands take time to build the requisite emotional connection with consumers, expect Tapestry to scout around for brands that have a proven track record of connecting with their targeted consumer base, as well as those that fit the group’s definition of luxury, whether here or abroad.Over at Kors, its number-one priority — the result of the $1.35 billion acquisition of Jimmy Choo, its first-ever — is to pay down the term loan “rapidly,” suggesting it is already on the hunt for more brands to grow its portfolio.Kors ceo John Idol, at a Morgan Stanley Global Consumer and Retail Conference last month, admitted as much in explaining the goal of paying down the debt: “We’re going to do that very rapidly and then we will be in an incredible position again with the balance sheet that’s [got] very, very little leverage on it — and so we’re prepared to do something of size and scale, and we have the means and the wherewithal to do that.” The company produces cash flow of $1 billion annually, and has access to a $1 billion revolving credit facility.Idol said of the credit facility, “It’s there for us to use so we can make sizable acquisitions even on our existing financing structure, not having to even go to the debt market if we don’t need to.”When Kors revealed its deal for Jimmy Choo back in July, Idol told WWD that the company is “creating a global luxury fashion group,” with a focus on “international fashion luxury [brands] that are industry leaders.”Wall Street analysts have noted that the Choo brand gave Kors an automatic “in” at the super high-end luxury level on a global scale. And Idol himself has noted on conference calls to Wall Street after posting quarterly earnings results that the company is not interested in brands in need of a turnaround.Perhaps that's because its core Michael Kors brand is still in need of some turning around. The company has followed the Coach brand's lead in pulling back on department store promotions and — as Idol promised to Wall Street analysts in conference calls — it has begun to introduce some product innovations in its merchandise offerings. But its core business in handbags — similar to the same pressures faced by the Coach and Kate Spade brands — remains challenged due to issues in the North American market. Adding to the problem is the lackluster fashion watch sector.For now, Idol and his management team are busy executing on their Runway 2020 plan, which is focused on increasing new offerings, and growing its digital and social media base. The early read on the Runway 2020 initiative — based on second quarter results in November — seems promising, helped in part by the continued pull back on promotions at the department store level.So if Kors is looking for another Jimmy Choo at the global, high-end luxury category, and one that’s not in need of any fixing to boot, what’s really left for acquisition?According to Idol at the Morgan Stanley presentation, “The bigger issue is going to be to be finding the target….We want to buy companies that have great quality and actually have high levels of recognition outside of the U.S. market. We don’t view the U.S. market as the high-growth engine for whatever brand we would acquire. We will actually probably say Asia first, Europe second and North America third.”With both Tapestry and Kors looking for brands that are industry leaders, and each not limiting themselves solely to any one particular geographic market, the two are likely destined to be competitors in their quest for the next big deal.

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