If history is any guide, Kate Spade & Co. is better off on its own.
Shares in the designer handbag maker soared 23 percent Wednesday, the largest move in five years, after a Wall Street Journal report said it hired bankers to explore a sale. But considering Kate Spade's unsuccessful history as part of a large conglomerate, the lack of attractive suitors and its premium price tag, the more fitting choice might be staying solo and taking itself private.
The fact that the company tapped bankers to look into a sale is understandable, prudent and to a certain extent expected: Kate Spade and other luxury brands including Coach Inc., Burberry Group PLC, and Michael Kors Holdings Ltd. have been the subject of a steady stream of M&A chatter over the last year as the industry struggles to get margin-biting promotional pressure under control and overcome a spending pullback at department stores, tourist hubs and outlet malls. Consolidation is a familiar antidote sought in these situations. Last month, Caerus Investors sent a public letter bemoaning Kate Spade's 41 percent stock dive over the last two years and urged the company to sell itself to a bigger outlet.
Like its signature satchel bags, Kate Spade would be a costly purchase for a buyer. The stock is valued at 21 times forward earnings, well below its two-year high of 55 but still pricier than competitors Michael Kors, Fossil and Coach, which are trading at multiples of 9.6, 13.7 and 15.5, respectively. For some possible suitors, that extra expense could be enough to put it out of reach.
Take Coach, which successfully integrated Stuart Weitzman after it bought the company for $574 million in 2015 and is on the hunt for another acquisition. A purchase of Kate Spade at a 20 percent premium would only be accretive if Coach paid at least 70 percent in cash, according to data compiled by Bloomberg. But Kate Spade has a market value of $2.3 billion and Coach has only $1.5 billion in cash on its balance sheet, meaning it would have to add to its already leveraged balance sheet to pull off a takeover.
Larger companies such as LVMH Moet Hennessy Louis Vuitton SE could better afford the price tag. It's less clear how much a company like Kate Spade would really help LVMH's business, though. The European conglomerate is moving away from the affordable side of luxury: It exited its stake in Michael Kors in 2003, and sold Donna Karan International earlier this year. Same goes for V.F. Corp., which Gadfly has argued is long overdue for an acquisition, but has been trying to move away from the fashion apparel business.
The thing is, Kate Spade spent the last decade getting rid of non-core and under-performing brands like Lucky Brand Jeans and Juicy Couture to focus on a goal of growing the business to $4 billion in revenue. It has fallen short, but it's not too late to get back on that path.
Kate Spade's revenue took a hit this year after it intentionally slowed discounts and pulled away from promotional department stores and outlet centers. It wanted to get back to the business of churning out trendy, fashion-forward bags and regain a luxury brand status that had faded as it relied on discounts and outlet stores to boost growth. In August, it cut 2017 sales and earnings guidance -- a move that ultimately made sense, but was unpopular with Wall Street and investors.
Hard choices to slow the rapid expansion and reliance on discounting that overexposed the brand and chipped away at Kate Spade's cachet wouldn't be any easier under another big, publicly traded company. Instead, Kate Spade would be better off partnering with a group of investors to take the company private. That way it could refocus its marketing, pricing, and outlet strategies -- and shore up its profits -- out of the public eye. Because as Kate Spade has learned, in order to grow its brand, it has to protect it first.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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