Coach Inc. will acquire Kate Spade & Co. for $2.4 billion or $18.50 per share, a 27.5% premium to the unaffected closing price of Kate Spade’s shares as of Dec. 27 2016, the companies said Monday in a press release.
The transaction has been unanimously approved by the Boards of Directors of Kate Spade & Company and Coach, Inc.
- Kate Spade in February said it was exploring “strategic alternatives,” following pressure in November from activist firm Caerus Investors, which urged it to consider a sale. Coach and rival Michael Kors have reportedly been eyeing separate bids on Kate Spade since January, and by the end of March, a deal looked imminent for Coach.
The tie-up could be a boon to both companies. “Kate Spade has a truly unique and differentiated brand positioning with a broad lifestyle assortment and strong awareness among consumers, especially millennials," Coach CEO Victor Luis said in a statement Monday. "Through this acquisition, we will create the first New York-based house of modern luxury lifestyle brands, defined by authentic, distinctive products and fashion innovation."
Luis said he believes Kate Spade could expand its global physical footprint to achieve "long-term, sustainable growth,” and he and Coach CFO Kevin Wills suggested that many of the elements of Coach's turnaround could be applied to Kate Spade. Coach has worked its way out of considerable doldrums to reclaim its place as a more upscale accessories retailer after heavy discounts and outlets sales damaged its margins as well as its brand. It’s been an uphill climb for the company, though it is seeing some traction and may now be better-positioned to take on more brands.
"[S]imilar to the steps Coach has itself taken over the last three years, we plan to reduce sales in Kate Spade’s wholesale disposition and online flash sales channels," Wills said on Monday. "Therefore, the reduction in profitability from the pullback in these channels will be offset by the realization of these substantial synergies."
Given this backdrop, GlobalData Retail analysts called Coach's acquisition strategy "both prudent and logical," and a "sensible" deal despite the high price tag.
"Kate Spade’s focus is on a younger consumer that Coach has some difficulty in attracting," GlobalData Retail Managing Director Neil Saunders told Retail Dive in an email. "This means the deal will allow Coach to expand, at a stroke, its customer base. The purchase also prevents the Kate Spade brand falling into the hands of a rival like Michael Kors; while this is not the prime driver of the acquisition, it is nonetheless a helpful side benefit."
Still, to be successful the merger requires "a degree of separation between the two businesses," Saunders also said. "The brands must remain distinct, which means the creative thinking and strategy of both businesses cannot become too intertwined. It is also the case that the main Coach brand, while in much better health, still needs much nurturing and care in a very tough environment; as such the company will need to keep a dual focus on both its new and established businesses."
The acquisition is another step in Coach's strategy to broaden its appeal to a younger, trendier customer base, Mickey Chadha, Moody's vice president, said in a statement emailed to Retail Dive Monday. "The acquisition gives Coach additional product lines and expansion opportunities, and while we expect the acquisition will increase Coach's financial leverage, the company does have some additional borrowing capacity within its rating category," he said.
While Kate Spade has faltered financially in recent months, it had attracted interest from at least six potential bidders since Caerus Investors’ wrote its letter in November, noting that the brand’s margins “are well below peers with material opportunity for expansion as licensing revenues grow and the business scales over time. A potential buyer would be able to realize material cost and revenue synergies over time."
In late April, the company posted unexpectedly weak first quarter earnings, in which net sales fell 1.2% or $3 million to $271 million — missing the FactSet analyst forecast for $299 million cited by MarketWatch. Q1 direct-to-consumer same-store sales declined 2.4%, or 8.1% excluding e-commerce. Same-store sales per square foot for Kate Spade New York stores were $1,516 for the latest twelve months, compared to $1,557 for the twelve month period ended Dec. 31, 2016.
Coach is in a stronger position in the marketplace. Despite its pullback from department stores and discounts, Coach reported in January that second quarter fiscal 2017 net sales rose 3.8% to $1.32 billion from $1.27 billion in the year-ago period. Coach's total North American brick-and-mortar same-store store sales rose approximately 4%, while aggregate North American same-store sales increased approximately 3%, including the negative impact of e-commerce. Sales at North American department stores declined some 30% on both a POS and net sales basis.
The company’s 2015 purchase of women's shoemaker Stuart Weitzman for $574 million has also paid off handsomely, lifting results in the last quarter with a 26% increase in sales. Luis has said the company is looking to diversify its brand further in light of that success. The retailer is also working to attract more young shoppers, most notably with its $10 million deal last year with pop singer and actress Selena Gomez to design her own product line and become the face of its brand.
Wills said on Monday he expects Coach to realize a run rate of approximately $50 million in synergies within three years of the deal closing. “[W]e expect that the acquisition will be accretive in fiscal 2018 on a non-GAAP basis, and will reach double-digit accretion by fiscal 2019, also on a non-GAAP basis,” he also said.