Coach And Michael Kors Still In The Hunt For Kate Spade

Handbag and accessories retailer Kate Spade recently confirmed speculation that it is exploring strategic alternatives for its business. Earlier it was reported that the company was working with a bank to contact possible buyers, including other retailers, according to CNBC, citing Dow Jones. Shares of the company were up 19% on December 28, after trade had been halted for a second time, once the news surfaced. Since then the shares have risen another 31%. The company was said to be under pressure from an activist shareholder, Caerus Investors, that had pushed the company to find an acquirer in order to improve its profit margins. The time of the sale would be opportune, with many companies, such as Coach (NYSE:COH), Michael Kors, PVH Corp., and VF Corp., all looking for acquisitions. According to Reuters, Michael Kors and Coach are among the companies that have made it to the second round of bidding, although they face competition from other bidders, included a non-US party.

Sale Speculation Hits A New High

The brand was once a part of Fifth & Pacific Cos., which had formerly been called Liz Claiborne Inc. Kate Spade became the shining star of the company, while the other brands stumbled. These other brands were then sold off by Liz Claiborne, including Juicy Couture, until the company was just left with Kate Spade. In addition to its own retail stores, Kate Spade’s brands, which also includes a men’s label called Jack Spade, are sold in department stores such as Saks Fifth Avenue and Nordstrom. The company also has outlet stores, where some of its merchandise is sold at reduced prices. Since the Fifth & Pacific company was rebranded as Kate Spade, after the sell-off of its other brands, its sale has been a topic of industry speculation. The brand has instead become a lifestyle brand, selling everything from apparel to home goods, and has plans of quadrupling its revenue to $4 billion annually.

The company registered a net sales growth of 10% in the fourth quarter of FY 2016. Despite its sale figure being quite small as compared to Michael Kors and Coach, it was one of the highest performing companies in the sector. With a change in consumer preference from larger bags, to smaller ones, Kate Spade has been one of the few companies able to cope well with this trend. While Kate continues to sell totes and other large bags, it also offers a variety of simple and creative clutches and cross body purses. Millennials being their target market, Kate Spade has also adjusted its products to a more colorful and whimsical look, with subtle logos. Unlike Coach and Michael Kors, which have been known for their loud logos, Kate Spade bags include a tiny stamp with its brand name. The former two companies are also now moving away from logos due to increasing preferences among millennials for clothing and accessories without labels or logos.

Given its decent performance, the brand has the potential of reaching its sales target, while also improving its profit margins. Even in the fourth quarter, the company managed to improve its EBITDA margins by 240 basis points. The brand’s appeal to millennials and its success across numerous categories could prove to be an attractive opportunity to a number of potential buyers, besides the synergies between two affordable luxury companies. Coach has long been considered a suitable buyer for Kate Spade, given the former’s focus on handbags and accessories. Furthermore, given the brand’s presence in department stores and also internationally, Kate Spade would have the ability to grow in these segments.

Attempt To Reduce Reliance On Promotions

Like its competitors Coach and Michael Kors, Kate Spade also has been working to reduce its dependence on promotions, and sell more products at their full price, in order to maintain their brand image. As per Instinet analysts, promotions at brands such as Kate Spade, Tory Burch, and Ralph Lauren were similar to the year prior, during the Holiday period. However, companies like Coach, Michael Kors, and Fossil Group offered deeper discounts. According to Wells Fargo estimates, although Coach looks to be more promotional during the Holiday season as against the year before, it was only modestly incremental. Furthermore, the company has excluded its Coach 1941 collection from the discounting, which makes up approximately 25% to 30% of its company value. Michael Kors has also been running its “buy more, save more” campaign, while Kate Spade was seen to be offering up to 70% discounts at its stores.

The root of the discounting problem lies with the availability of these brands at the wholesale or outlet stores, which have been offering huge discounts to attract customers. Coach was among a number of brands trying to cut back its presence in this channel. Michael Kors, which generates about 40% of its sales from its wholesale locations, is also reducing the amount of merchandise it sells through the channel. Kate Spade, which is still building out its wholesale network as it is a much smaller brand, is also taking a careful and cautious approach. Since outlet stores are usually located in tourist locations, they’ve been hit particularly hard, as a strong dollar has hit the tourist inflow into the US.

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