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Coach Said to Be Readying Kate Spade Buy

Sources say Coach is set to soon announce its intention to acquire Kate Spade. But will another bidder get there first?
Kate Spade Spring/Summer 2017 | Source: Facebook
By
  • Lauren Sherman

NEW YORK, United States — In December 2016, Coach chief executive Victor Luis told BoF that the American-based accessible luxury goods company, which bought like-minded shoemaker Stuart Weitzman in January 2015 for more than $500 million in cash, is ready to open the gates of its stables to more brands.

"We believe that Coach Inc. can be bigger than the Coach brand," he said. "The priority, we've said clearly, is terrific brands where we can leverage the Coach know-how, which is especially strong in our ability to develop brands both internationally and domestically. We've done quite well in growing the Coach business across the world, especially Asia."

It seems that, after months of speculation, that time has come. According to sources inside both companies, Coach’s acquisition of Kate Spade may be announced in a matter of weeks, if not days. “Coach has a long-standing policy of not commenting on rumors and speculation,” a Coach representative told BoF. Kate Spade also declined to comment.

The price of acquisition is not yet known, although analysts suggest it could be north of $2 billion. In a March 2017 report, Cowen & Company said that there was an 80 percent chance Kate Spade would be acquired, raising its target price to $27 per share. (On Friday, Kate Spade & Company, which trades as KATE on the New York Stock Exchange, ended trading at $23.29 per share.)

In 2016, Kate Spade & Company reported net sales of $1.4 billion, with adjusted EBITDA — earnings before interest, taxes, depreciation and amortisation — reaching $259 million. Coach ended its 2016 fiscal year with net sales of $4.5 billion, $3 billion in gross profit and $1.9 billion cash, cash equivalents and investments.

Rumours that Kate Spade & Company — the public entity once known as Fifth & Pacific Companies, and before that Liz Claiborne, Inc. — was on the auction block surfaced in November 2016, when hedge fund Caerus Investors suggested that the business was undervalued on the stock market and would make for a prudent purchase. Michael Kors and Coach immediately emerged as potential buyers, but Coach's long term, publicly laid-out strategy to increase shareholder value through diversifying assets better aligned.

There are synergies in sourcing from a leather perspective, and synergies in terms of global development.

Along with a reported play for British luxury firm Burberry, Coach was said to also have explored purchasing New York-based brands Diane von Furstenberg and Rebecca Minkoff, the latter of which sold a minority stake to private equity firm TSG Consumer Partners in 2012. (Coach declined to comment.)

While Burberry rebuffed overtures, Coach did not go further than evaluating Diane von Furstenberg or Rebecca Minkoff, said the people. Diane von Furstenberg, with its focus on apparel, would have been an interesting match. But both businesses, while operating their own stores, are reliant on wholesale. Coach prefers the direct-to-consumer model. Meanwhile, just a week ago, rumours surfaced on trading information feed Benzinga that luxury conglomerate Kering was eying Coach as an acquisition target. (“Unfortunately we never comment on market rumours,” a Kering representative told BoF. Coach also declined comment.)

Other than being a bargain, according to activist investor Caerus, insiders suggest that Kate Spade is appealing to Coach because it is a true lifestyle brand, touching several major events in the consumer’s life, including weddings, engagements, special occasion and domestication. Coach, on the other hand, has long owned one milestone — the graduation gift — but remains otherwise disconnected from event-based purchasing.

In 2016, net sales of women’s handbags and other leather accessories at the Coach brand were $3.1 billion, while all men’s product amounted to $725 million and “all other” women’s product — shoes and clothes — totaled $307 million. At Kate Spade, women’s accessories accounted for a little over $1 billion in sales, but sales of "apparel, jewelry and other" — which also includes the minuscule men’s business — were $356 million.

As with Coach, handbags account for the majority of sales at Kate Spade, but other products — including apparel and perhaps more importantly, housewares including dinnerware and stationery — make up a larger portion of the business.

“We believe the growth profile coupled with the brand’s unique appeal to millennials and broad-based success across categories ranging from handbags to apparel and jewelry could be attractive to many buyers, including Coach,” Mizuho Securities analyst Betty Chen wrote in a December 2016 note.

Kate Spade is also growing globally, with international net sales of $202 million in 2016, up 7 percent year over year. Those numbers would have been higher but were offset by failed projects, including the closures of Jack Spade brick-and-mortar stores as well as Saturday stores, and the closure of the company’s directly operated business in Brazil.

“There are synergies in sourcing from a leather perspective, and synergies in terms of global development,” says Oliver Chen, managing director and senior equity research analyst at Cowen & Company. “It’s not over distributed, and it’s executing in non-handbag categories as well.”

But Coach would not be getting a perfect business with an acquisition of Kate Spade. The aforementioned closure of its hipper, more casual Saturday brand — which suffered from too-fast retail expansion — and the shrinking of its men’s business, once a mainstay in a fast-growing market, indicate that there is work to be done.

And while Kate Spade chief creative officer Deborah Lloyd has been lauded with transforming the brand from a well-loved-but-niche player into a globally recognised brand name, it could be argued that its aesthetic — grounded in 1950s and 1960s-vintage inspired tea dresses and pop prints — has been slow to evolve to reflect ever-changing consumer tastes.

Whether or not Kate Spade would experience business or creative executive changeover as it enters the Coach fold remains to be seen. In 2013, Coach hired Stuart Vevers to change directions after the departure of longtime creative director Reed Krakoff, while Stuart Weitzman hired Loewe designer Giovanni Morelli in 2016 to succeed the company's namesake.

For now, employees and shareholders alike are simply waiting patiently for the release to go out on the wire. But there is, according to analysts, still a chance that another bidder could come in with a better deal for Kate Spade. Right now, Coach has about $800 million in cash to spend, and its stock is trading at around $39 per share. It’s assumed that Michael Kors — the most likely other bidder — would use stock (currently trading at about $37 per share) to purchase the company.

Whatever happens, it’s clear that Coach’s board is eager for the Kate Spade transaction to go through. While Vevers’ revitalisation of the Coach brand has resonated with the industry and consumers, the board believes substantial growth — and increased shareholder value — will come from acquisitions. “The Coach brand is comping closer to low-to-mid single [percentages], it’s not aggressively growing,” Chen says. “To obtain a higher valuation in retail, you need to accelerate growth.”

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