Coach’s Acquisition Of Kate Spade Finally Comes To Fruition

COH: Coach logo
COH
Coach

After months of speculation, Coach (NYSE:COH) announced on Monday that it was buying Kate Spade for $18.50 per share, valuing the deal at $2.4 billion. The transaction represents a premium of 27.5% to the closing price of Kate Spade from December 27, 2016, and a 9% premium to the closing price on Friday. In the wake of speculation regarding the sale of Kate Spade, the company’s stock had risen significantly. The complementary nature of the businesses should result in savings of $50 million within three years of the deal closing, according to Coach’s CFO.  Both companies’ shares ended the day higher, with that of Kate Spade rising 8%, and Coach Inc. increasing by almost 5%. Below we highlight some of the key takeaways from the acquisition.

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1. Improved Margins For Kate Spade

Coach’s decision to pull the company’s handbags and leather goods out of 25% of department stores has been a positive step, as the heavy discounting in this channel has hurt its luxury brand image. Furthermore, the company intends to reduce the markdown allowances to the channel, citing a highly promotional environment embraced by such stores. While this strategic decision negatively impacted sales by 150 basis points in the third quarter of 2017 (ended March), the move resulted in an improved bottom line for the company, as a consequence of higher gross margins in each segment.

Coach intends to undertake similar moves for Kate Spade in order to ensure the long term viability of the brand. According to Kevin Wills, steps will be taken to “reduce sales in Kate Spade’s wholesale disposition and online flash sales channels.” Being part of a bigger conglomerate would also help the company to cut down on its costs and therefore, give a boost to its margins. Affordable luxury is a highly competitive market. Hence, heavy discounting can result in the loss of brand value, and can be ill-afforded by many of the weaker brands.

2. Access To Millennial Customers

Kate Spade has had great success with millennial customers, who have been the driving force behind the high growth rates the company has achieved. 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 and were slow to adapt to this small logo trend, 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 of clothing and accessories without labels or logos. Hence, an acquisition of Kate Spade would give Coach access to a younger clientele. Approximately 60% of Kate Spade’s clientele are millennials, according to Coach.

3. Creation Of A New York-Based Modern House Of Luxury

Coach acquired footwear brand Stuart Weitzman for $574 million in 2015, and its results in subsequent quarters have been boosted by stronger-than-expected sales from the footwear company. Coach has been able to effectively integrate the company, while carrying out the transformation of its brand. The purchase of Kate Spade marks its most expensive purchase to date, and is the latest purchase by the company which aims to build a luxury group along the lines of LVMH and Kering, but in a unique New York-based way. The combination of the two will lead to a luxury lifestyle company with a diverse, multi-brand portfolio.

4. Growth Potential Internationally For Kate Spade

Given Coach’s extensive international presence, it would put the company in a good position to “unlock Kate Spade’s largely untapped global growth potential,” according to Victor Luis, CEO at Coach. Among the growth opportunities lies China, where he further states that only 1% of the consumers can name the Kate Spade brand without prompting, while 23% can identify Coach. With 35% of the former’s stores overlapping with Coach’s locations, it also leaves room for closures in markets in North America, where the two retailers compete, but the numbers for such are seen as minimal.

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