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.
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.
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.
adapted from BOF
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