The rumblings that Kate Spade & Co (NYSE:KATE) was exploring a sale started at the end of 2016. From that point on, everyone assumed Coach Inc (NYSE:COH) would be part of the conversation, and COH stock trickled higher as the certainty built.
Well, on Monday, Coach made it official. The luxury accessory firm has announced that it will pay $2.4 billion for the handbag maker.
It shouldn’t come as a surprise to most investors, and it’s certainly a reason to buy COH stock if you’re playing the odds.
Just don’t call it a sure thing. Because Kate Spade comes with a whole slew of problems. After all, why else would it be put up for sale in the first place?
Kate Spade Joins Coach’s Fashion Conglomerate
It’s OK to be cautiously optimistic about Coach successfully integrating Kate Spade into its business model.
“The acquisition of Kate Spade is an important step in Coach’s evolution as a customer-focused, multi-brand organization,” said Coach CEO Victor Luis in a press release. “The combination enhances our position in the attractive global premium handbag and accessories, footwear and outerwear categories, bringing product, brand positioning and customer diversification to the portfolio. … We believe the Kate Spade brand will benefit from our best-in-class supply chain and strong corporate infrastructure.”
Kate Spade is in a better position today than it was yesterday.
The fact is Coach is building a retail conglomerate similar to the one Kate Spade used to be a part of — who doesn’t remember Liz Claiborne? — and should benefit from Coach’s size and position in the retail marketplace.
Recently, Coach hired former Jimmy Choo boss Joshua Schulman as the head of its eponymous brand. Jimmy Choo is up for sale and would make a very nice stablemate for Stuart Weitzman, which COH acquired in 2015.
Coach Has Come a Long Way
Liz Claiborne paid $124 million for Kate Spade back in 2006 when Liz Claiborne was still a huge deal in retail. Eleven years later, KATE gets acquired for $2.4 billion — a 30.9% annualized return, albeit after taking a very circuitous route to extracting value for shareholders.
Over the past two years, Coach itself and COH stock have gone through a painful transition that saw its profit margins shrink as it purposefully slowed sales to department stores and other promotion-heavy retailers, to improve its brand credibility and obtain higher price points.
It’s not easy running multi-brand organizations, as former Liz Claiborne shareholders will attest. However, it helps if your price points are higher up the luxury ladder. Coach was slowly becoming another retailer caught in the middle. That’s no-man’s land in an omni-channel world.
Now it plans to take Kate Spade through the same painful transition.
“Due to the complementary nature of our respective businesses, we believe that we can realize a run rate of approximately $50 million in synergies within three years of the deal closing,” said Kevin Wills, Coach’s Chief Financial Officer. “At the same time, to ensure the long-term viability and health of the Kate Spade brand, and similar 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.”
It’s not how much you sell, but how much you make from what you sell.
There’s a big difference, and that’s the upside Coach management seek from Kate Spade. By 2019, Coach expects Kate Spade to be very accretive to earnings. Time will tell if it’s right.
Should You Buy COH Stock?
The early consensus from investors is “heck yes!” Coach shares are up almost 7% in early May 8 trading, so investors clearly see value in the acquisition.
COH paid a lot for a brand that hasn’t exactly had an easy time booking profits in the past few years, but it has a better chance of delivering them than Kate Spade’s existing management does.
The best part of this deal? Coach took out a competitor and at the same time put some more heat on Michael Kors Holdings Ltd (NYSE:KORS).
My recommendation is to buy a half- to quarter-position (based on $10,000 for a full position) in COH stock today, then wait to buy more when it drops under $40. And if it ever hits $30 as it did back in September 2015, I’d buy a whole lot more.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.