The Addiction to Discounting at Michael Kors Is Exposed in Court

Soon after a new chief executive joined Michael Kors in 2023, the CEO sent an email to his wife, detailing how excessive discounts were hurting the label, WWD reported. He called the U.S. business a disaster.

The private emails are part of the evidence and testimony that has surfaced during an antitrust trial over the proposed merger of Michael Kors with handbag rival Coach. 

The two brands used to be neck-and-neck competitors. Michael Kors has fallen so far behind in recent years that Coach no longer considers it a direct threat, a Coach executive testified.

The diminishment of head-to-head competition between the two brands is one way Coach parent Tapestry TPR 0.73%increase; green up pointing triangle hopes to convince a federal judge to greenlight its $8.5 billion acquisition. The Federal Trade Commission sued to block the deal, arguing it would hurt consumers by allowing the companies to raise prices.

Closing arguments are scheduled for next week, but it could be weeks before U.S. District Judge Jennifer Rochon issues a ruling. 

The logic for fashion deal 

Tapestry wants to buy Michael Kors parent Capri CPRI 0.34%increase; green up pointing triangle, which also owns Versace and Jimmy Choo, because it sees an opportunity to turn around the Kors brand. Tapestry executives argued that it would be unable to raise prices on existing Michael Kors products. They said consumers will only pay higher prices for products that use higher quality materials or improved design features.

Once white hot, Michael Kors has been in a downward spiral for years. Sales have fallen 25% since they peaked in 2016 at $4.7 billion. The brand had $3.5 billion in sales as of its most recently reported fiscal year, which ended in April.

A decade ago, Michael Kors was the stronger brand. Today, the Coach brand, with more than $5 billion in annual sales, is larger, having undergone a revival under Creative Director Stuart Vevers and a management team that is skilled at mining customer data to design products that connect with shoppers.

Capri Chief Executive John Idol monitored the email alerts that Coach sent to customers and urged his staff to react. After one Coach promotion, he wrote Michael Kors had no choice but to respond. 

In another message, Idol wrote some of Michael Kors’s marketing materials looked cheap and uninspiring compared with Coach’s. 

Meanwhile, Leigh Levine, Coach’s North American president, said the Michael Kors brand had declined so much that Coach no longer pays much attention to it. 

Playing down your products

Antitrust lawyers not involved in the case said highlighting Michael Kors’s struggles helps the defendants by showing Coach and Kors are no longer direct competitors.

“The companies are saying that this merger won’t reduce competition because Kors is so weak,” Barry Barnett, a partner in the law firm Susman Godfrey, said. “Tapestry has to revive it before it can raise prices.”

Other companies facing FTC scrutiny have played down the effectiveness of their products. In 2021, the FTC accused Altria of abandoning its e-cigarette business at the request of rival Juul, in which it owned a stake. Altria said it pulled the plug because its e-cigarettes were really bad. Altria sold its Juul stake and the FTC dismissed the case. 

When Kors founded his eponymous label, he cultivated a celebrity following for his glamorous dresses and other jet-set clothes. Nevertheless, the brand filed for bankruptcy in 1993. It re-emerged and really took off in the early 2000s. Idol, who had previously worked at Ralph Lauren and Donna Karan, bought the company along with a Hong Kong private-equity firm in 2003. 

Kors became a household name after he joined the TV series “Project Runway” as a judge in 2004. His new backers expanded the business by opening stores and pushing into new categories such as shoes, watches and eyewear. 

The company went public in 2011 with a $4.62 billion market valuation, a shade higher than its current value. By 2014, it was hard to walk down the street or ride the subway of a major city such as New York without seeing countless Michael Kors handbags. 

Idol said that casting a wide net was egalitarian. “Michael and I would find it offensive that someone would be considered beneath owning one of our products,” Idol said in a WSJ interview a decade ago.

When called to testify at the trial in early September, Idol said the brand was getting squeezed by rivals at the top and the bottom of the market. He estimated that maybe one out of every 200 women now carry Michael Kors handbags.

Write to Suzanne Kapner at suzanne.kapner@wsj.com