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Coach Shares Sink After Kate Spade Acquisition Weakens Forecast

Coach Inc's weaker-than-expected annual forecast sent shares down by the most in four-and-a-half years. Projected earnings were hurt in part by efforts to pull Kate Spade from many department stores.
Selena Gomez for Coach | Source: Courtesy
  • Bloomberg

NEW YORK, United StatesCoach Inc.'s acquisition of handbag rival Kate Spade & Co. is proving to be a difficult task.

The company gave a weaker annual forecast than Wall Street had predicted, hurt in part by efforts to burnish the Kate Spade brand by pulling it out of many department stores. That sent the shares down the most in four-and-a-half years on Tuesday.

The outlook suggests that Coach’s efforts to become a multibrand company will weigh on earnings for the foreseeable future. The company bought Kate Spade in July for $2.4 billion, aiming to appeal to more millennials. But Coach also set out to decrease the business’s reliance on so-called flash sales and the troubled department-store industry — no easy feat.

“Expectations were pretty high after the acquisition, but the reality is Kate Spade was overdependent on clearance online sales, which were a bigger part of the mix than they were for Coach,” said Brian Yarbrough, an analyst at Edward Jones & Co. “Now they are being reset, and there will be some short-term pain.”

Coach expects earnings this year of $2.35 to $2.40 a share. Analysts had estimated profit of $2.50. Revenue will grow about 30 percent to as much as $5.9 billion, also shy of predictions.

Shares of the fashion house fell as much as 14 percent to $41.20 in New York trading, the biggest intraday slide since January 2013. The stock had gained 37 percent this year through Monday’s close.

The retail industry’s broader slowdown also doesn’t give New York-based Coach much margin for error.

"In an unpredictable environment, we are evolving to drive our long-term success by reinventing ourselves," chief executive officer Victor Luis said in a statement.

Excluding some items, earnings were 50 cents a share last quarter. That beat projections by a penny.

Sales were $1.13 billion during the period, short of analysts’ average $1.15 billion estimate. Gross margin, the percentage of sales remaining after deducting the cost of production, fell to 66.5 percent from 67.8 percent. That measure is expected to decrease in fiscal 2018, chief financial officer Kevin Wills said on a conference call Tuesday. As the Kate Spade business runs at a lower rate, it will put margins under pressure in the first half.

The purchase of Kate Spade — part of Coach's plan to build a global luxury fashion house with multiple brands — was followed last month by the $1.2 billion acquisition of shoemaker Jimmy Choo Plc by Michael Kors Holdings Ltd. Wills said the company plans to seek strategic acquisitions for brands to drive growth.

Coach has been working to make its namesake brand more upscale — especially with the 1941 luxury collection — to lure consumers to pay full price. Earlier this month, it introduced a collection of handbags and accessories in collaboration with actress and singer Selena Gomez, the company's brand ambassador.

Luis, the CEO, sees untapped opportunity in Kate Spade outlets. He expects to open as many as 25 stores for the brand in the new fiscal year, with most of them coming in that form. That will partly help offset the reduction in the online flash sales, he said on the conference call.

As part of its move to diversify beyond handbags, Coach plans to expand its offerings for men, which accounted for almost 20 percent of total Coach brand sales in the fourth quarter. That category has the potential to become a $1 billion business, Luis said. The company appointed an executive from Jack Spade, a menswear brand from Kate Spade, to head up the men's business for the Coach brand. It will also launch a new creative direction for its shoe brand, Stuart Weitzman, in April next year, he said.

Coach has reduced 25 percent of its department-store locations and cut promotional events in the channel, with its days on sale down by more than 35 percent for the year, Luis said.

Fewer markdowns in the luxury market would benefit the overall industry, said Simeon Siegel, an analyst at Instinet LLC.

“With fewer handbags on promotions, brands should get elevated automatically which is something that we’re seeing,” he said. Customers are being “retrained to pay full price, which is positive.”

By Stephanie Wong; editors: Nick Turner, Mark Schoifet.

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