In reaching a deal to buy Kate Spade & Co., Coach Inc. not only stayed true to its roots, but signaled to investors that it continues to define American luxury as one based on “inclusiveness.”
Coach on Monday said it had inked an agreement to buy handbag competitor Kate Spade in a cash transaction valued at $2.4 billion. That valuation puts the per-share purchase at $18.50, showing that Coach knows how to stay disciplined and focused even as some financiers and bankers believed a deal could happen at the $24-plus-range. But then Kate Spade last month posted lackluster first-quarter results that helped expectations come back down to earth. The deal, which is part of Coach’s evolution to become a “customer-focused, multibrand organization,” is expected to close in the third quarter of the calendar year.
In a telephone interview, Coach chief executive officer Victor Luis said Craig Leavitt, currently ceo of Kate Spade, and his team would continue on at Coach. “We have absolutely secured the [Kate Spade] team there today to ensure a smooth transition. We are happy with the work that they’re doing.”
Luis also spoke about how Kate Spade fit Coach’s acquisition parameters. Noting that Kate Spade is a young brand with a lot of opportunity for growth, Luis said, “What excites us most, first and foremost, is its unique positioning and brand attitude.” He said its positioning is different from that of Coach, and that Kate Spade’s whimsical, fun and fashionable positioning resonates, especially with a strong Millennial customer base: “The size of the potential opportunity with Millennials as they age will be a key driver of organic luxury growth, globally.”
It also helped that there are synergies on the back end through the Coach, Stuart Weitzman and Kate Spade brands. “Together, we’ll have greater ability in our leather goods supply chain, development costs and manufacturing scale to scale our systems more broadly,” Luis said.
Coach believes that it can realize a run rate of $50 million in synergies within three years of closing the deal. And pulling back Kate Spade’s distribution in the wholesale channel — mostly at off-pricers — and online flash-sale channels is expected to help the acquisition be accretive in fiscal 2018 on a non-GAAP basis, and reach double-digit accretion by fiscal 2019, also on a non-GAAP basis.
While sourcing has been often talked about by Wall Street analysts as to why Coach is the ideal buyer for Kate Spade, little has been said on what the company brings to Coach — other than the opportunity to grow the Kate Spade brand internationally in Europe and Asia.
When Coach acquired Stuart Weitzman, Luis told WWD the shoe brand allowed the company to learn about designing and producing footwear. At the time, Coach’s footwear line was produced under license with Jimlar. Since last year, Coach has taken back its footwear line to produce in-house.
According to Luis, what the group can learn from Kate Spade is centered on the licensing space and possible opportunities for the Coach brand. “Kate Spade has a broader licensed portfolio in categories we’re not present in. We can learn about those opportunities and how they manage them,” he said.
But perhaps what’s more interesting from the Kate Spade deal is how Coach looks at the idea of lifestyle and how it views modern luxury. Both are factors that give a broad overview of where it sees itself in the luxury hierarchy and what it could look for in future acquisitions as the firm seeks to transform itself into a holding company of luxury brands.
First, forget the talk and think about needing a European brand — such as the price point of Jimmy Choo or the traditional history attached to Bally, both of which were put up for sale by JAB Holding Co. last month — to give Coach instant luxury credibility. While Coach may have visions of becoming a brand conglomerate similar to Europe’s LVMH Moët Hennessy Louis Vuitton or Kering, that’s where the similarity ends. Coach is looking at building its conglomerate the “American” way.
According to Luis: “Lifestyle is perhaps one of the most important [factors] because it speaks to our vision for Coach Inc. and what our group of companies represent. We’ve been very specific in our language about creating the first New York-based house of modern, luxury-based brands. New York speaks to our corporate home in New York City. For us, that’s an important reflection of the values in our home city — a city that is inclusive, home to immigrants and a part of our founding. New York is a city that believes anything is possible, and I think that is an important first piece.”
The second piece centers on how Coach defines modern luxury. According to Luis, “Modern luxury, how we define it for ourselves, is about quality and great design, while at the same time offering the customer an emotional experience through great brands, its history and narratives. Modern for us is different from the traditional European groups. [For us,] it’s about being inclusive, not exclusive based on price. It is not based on a country of origin, [nor] is it made in any specific market as traditional luxury brands are.”
While inclusiveness can mean accessibility — Luis’ predecessor Lew Frankfort is often credited with coining the phrase “accessible luxury” — by price point to the masses, in the case of Coach it also can include brands from overseas that represent the same mind-set. And that perhaps provides the biggest insight yet on how Coach might evaluate future acquisitions as it builds its brand portfolio.
“Coach, Stuart Weitzman and Kate Spade are born American, and while they were born in New York, we don’t see our future limited by that. There can be great modern luxury brands based in Europe. Modern luxury is more about value and attitude,” Luis said.
Each brand acquisition that Coach has done so far has been with a brand that is younger in age. But don’t expect the company to take a page from the beauty sector’s playbook and buy younger brands that it can incubate. “Modern luxury is not based on age. Retail premium brands are very difficult to build. Great premium brands take time, based on the emotional connection [with the consumer that’s] sustained over the long term, and on shared qualities of great design, materials and craftsmanship as well as constant innovation,” Coach’s ceo said. He added that it’s “difficult to find younger brands that have great emotional connection with the consumer and have the ability to be global brands in key markets.”
Coach shares rose 4.8 percent to close at $44.71, while Kate Spade shares closed up 8.3 percent to $18.38 — both companies trade on the Big Board.
In keeping with its goal of fiscal responsibility, Coach elected not to issue equity, but instead to pay for the deal in cash and debt — which it plans to pay off quickly. Because of that, Coach isn’t planning big deals for a while. Coach’s chief executive officer Victor Luis told Wall Street analysts in a conference call, “I think in the short-term, you could definitely say that we’re not going to be looking at any major acquisitions.”
Luis didn’t rule out the possibility of small deals the size of Stuart Weitzman — Coach paid $574 million in 2015 for the footwear brand — or smaller, or even buying back distributors across the world, whether that be for the Coach, Kate Spade or Stuart Weitzman brands.
Coach said it will fund the deal by a combination of senior notes, bank term loans and $1.2 billion of excess cash, a portion of which will be used to repay an expected $800 million six-month term loan. Coach said it has secured committed bridge financing from Bank of America Merrill Lynch.
Despite the jump in Coach’s share price, not everyone was positive about the acquisition. J.P. Morgan’s Matthew R. Boss has a “Neutral” rating on shares of Coach, noting that the acquisition is “healthy for the promotion-plagued accessories industry.” Citi Research’s Paul Lejuez said he wasn’t sure if the deal for Kate Spade “adds economic value,” and even questioned whether Coach’s management has even proven if they are “good” at acquisitions. That’s mostly because Lejuez thinks it’s too early to classify the Stuart Weitzman deal as a success, as well as because the $2.4 billion deal for Kate Spade is a “big bet in a category that has faced recent pressures.”
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