Consumer

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

About a year ago, handbag maker Kate Spade launched its "#missadventure" advertising campaign starring Anna Kendrick, the latest episode of which is called "The Joy Ride." For investors, the vignette  -- featuring the actress,  Kate Spade products,  a dog and a car-sharing co-conspirator -- may offer a temporary diversion from their own misadventures holding the stock, which has been less than a joy ride of late. 

On The Outs
The handbag maker -- formerly known as Fifth & Pacific and Liz Claiborne -- is on track for its first annual slump since the finanical crisis.
Source: Bloomberg

Kate Spade shares have dropped about 37 percent so far this year, one of the worst slumps among members of the Bloomberg Intelligence Luxury Goods index. Like other handbag makers, Kate Spade has been discounting its products amid slowing department-store traffic and increased competition (it's had at least three ``up to 75 percent-off'' sales in the last few months, by my count). And the $2.6 billion company has missed analysts' quarterly revenue estimates more often than it's beaten them this year.

But these misses obscure what's actually a pretty decent growth story. Same-store sales have increased by double-digits in all but one quarter since Kate Spade sold off Lucky jeans in early 2014. Competitors Michael Kors and Coach can't claim that kind of track record. And the company's still relatively small store base, marketing geared toward millennials and efforts to keep inventory fresh are helping keep the growth alive: Kate Spade is projected to increase sales faster than the vast bulk of big North American retailers.

Several analysts dubbed it a Black Friday winner. And yet, the shares were down 2.3 percent on Friday and another 2 percent on Monday. What gives? It's these types of disconnects that create buying opportunities -- for investors, if not buyout firms. 

Most retail private-equity targets these days are fixer-uppers (think Jones Group or Red Lobster). Kate Spade is the other kind, the one whose enormous growth potential could be better exploited and accelerated away from the public market. 

As a private company, Kate Spade could better experiment with different levels of discounts and continue to build recognition as a lifestyle brand. The company says it's cutting back on the promotions, a move that will align it more with higher-end luxury retailers such as Louis Vuitton and Chanel, which typically eschew discounts. It remains to be seen if the strategy will work. There's also room for a buyer to slash costs, with Kate Spade's margins lagging behind peers.

For private-equity firms that see the potential in Kate Spade, now be a good time to pounce. Relative to its sales, the company hasn't been this cheap in years.

Better Value
Kate Spade is now more reasonable for potential buyers.
Source: Bloomberg

Kate Spade investors are going to want a hefty premium in a sale, but a buyout firm would be starting from a more reasonable valuation. The promise of a payday down the road could make the price tag worth it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net