Investor Essentials Daily

Wealthy consumers will create demand even during a recession

March 19, 2024

Recessions disproportionately affect disadvantaged and lower-income groups, but some industries, particularly luxury accessories, demonstrate resilience.

This resilience stems from luxury brands catering to wealthier consumers less affected by economic downturns, allowing them to maintain sales even as discretionary spending declines overall.

Tapestry (TPR), with its portfolio of luxury brands like Coach, Kate Spade, and Stuart Weitzman, exemplified this during the late-2000s Global Financial Crisis by increasing revenues.

In 2023, Tapestry announced the acquisition of Capri Holdings (CPRI) for $8.5 billion, aiming to add Versace, Jimmy Choo, and Michael Kors to its portfolio, expanding its luxury brand offerings and boosting its annual revenues significantly.

Despite initial market skepticism, Tapestry’s strategy of owning a diverse range of luxury brands positions it well to appeal to wealthy consumers globally, offering an attractive investment in the luxury sector’s resilience through economic cycles.

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Recessions often hit the disadvantaged and lower-income groups the hardest.

While many industries see declining sales during recessions, especially those relying on discretionary consumer spending, some sectors have proven more resilient than others.

In particular, luxury accessories sales have shown signs of holding up even in tough economic times.

A key factor contributing to luxury’s recession-proof qualities is its reliance on higher-income consumer segments less impacted by job or wealth losses affecting middle- and lower-income households.

Even in a downturn, wealthy clients continue pursuing coveted luxury purchases as symbols of status and achievement. While discretionary spending pulls back overall, luxury demand has remained steadier due to its wealthy, less sensitive customer base.

One of the great examples of this resilience is the case of Tapestry (TPR).

During the late-2000s Global Financial Crisis, when many retailers saw sales plummet, Tapestry managed to increase its revenues year-over-year.

This countercyclical performance demonstrated the recession-proof qualities of its portfolio of aspirational luxury brands like Coach, Kate Spade, and Stuart Weitzman.

Since then, Tapestry has built on this foundation through strategic acquisitions.

In 2023, the company agreed to acquire Capri Holdings (CPRI) in an $8.5 billion all-cash deal. The acquisition will add prestigious high-end labels Versace, Jimmy Choo, and Michael Kors to Tapestry’s stable, expanding its luxury brand portfolio like never before.

By bringing together a powerful collection of globally recognized luxury names under one roof, Tapestry is positioning itself as one of the leaders in the industry.

The deal will boost Tapestry’s annual revenues by almost 80% to $12 billion-plus overnight while expanding its geographic footprint and product assortments across diverse luxury segments from apparel and footwear to accessories.

However, the market initially punished Tapestry’s stock on the Capri acquisition news, likely concerned about integrating the companies and achieving promised synergies.

But such near-term reactions fail to fully credit Tapestry’s track record of acute dealmaking and brand stewardship.

By owning a diverse mix of the world’s most coveted luxury brands, Tapestry can appeal to a wide range of global luxury consumer profiles across economic cycles.

Even if a recession slows broad spending, wealthy shoppers will continue seeking iconic products. Tapestry’s expanded multi-brand strategy positions it to capture resilient high-end demand worldwide.

For long-term investors, Tapestry offers a play on luxury sector strengths with a proven brand portfolio, management team, and balance sheet to weather economic uncertainty.

Only time will tell if its vision of a global luxury powerhouse comes to fruition. But for now, Tapestry remains well-armored to withstand turbulent times.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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