By  on February 16, 2017
Kate Spade RTW Fall 2017

Shares of Kate Spade & Co. spiked Thursday after the company confirmed it was reviewing its strategic alternatives, but not everyone agreed about how much Kate could provide in terms of growth trajectory.The company — which also posted fourth-quarter results — confirmed that it was undergoing a strategic review that includes a potential sale. The company in November had been pushed to undertake that action by activist investor Caerus Investors, a New York hedge fund. The accessories firm said, “The board plans to proceed in a timely manner, but has not set a definitive timetable for completion of this process.” Kate noted there was no guarantee that the process would result in a sale.Speculation has centered on Coach Inc. and Michael Kors Holdings Ltd. as possible acquirers. There has also been talk that private equity firms might have considered Kate, but the consensus seems to be that a strategic buyer would make more sense.Shares of Kate rose 14.7 percent to close at $22.56 on the Big Board.The accessories firm’s fourth-quarter results — net income rose 39.2 percent to $85.5 million, or 67 cents a diluted share, on a 9.8 percent net sales gain to $470.8 million that included a same-store sales decline of 1.5 percent – for the three months ended Dec. 31, had some Wall Street analysts betting that a sale would occur this year.The results, and the adjusted EPS of 41 cents that easily beat analysts’ consensus estimate by 6 cents, had Wunderlich Securities Inc. analyst Eric Beder concluding that its fourth quarter was “solid” on many levels. Driven by better-than-expected international margins and strong overall operating leverage, as well as a direct-to-consumer comps gain of 9.3 percent, Beder said the results reflect the company’s “continued focus on fashion newness and reducing overall discounting.”Jefferies analyst Randal Konik saw Coach — further along in its turnaround — as the better suitor. He also cited Coach’s experience in leveraging the team’s technical expertise and effecting a seamless integration of its Stuart Weitzman acquisition. As for Kors, Konik said that with shares of the company trading in “such deep value territory and $642 million in projected [free cash flow for fiscal 2018], we believe share repurchases would be a better alternative for rewarding investors.”Mortimer Singer, chief executive officer at Marvin Traub Associates, believes Coach, Kors and PVH have each considered a Kate acquisition. He said, “These things come down to deals that move the needle….Spending time on a $200 million acquisition or one that’s $3 billion takes similar time and effort, but a larger deal can mean seismic shifts in who you are as a company.”Singer said Kors, which has $200 million in cash, would need high-debt financing to get a deal done. He said that the “average duration from rumor to deal is seven to eight months,” which means a Kate deal could happen by midsummer.Wells Fargo analyst Ike Boruchow said that with the better-than-expected holiday results, and historical takeout multiples in the space, Boruchow said a takeout could have a “valuation range” of $24 to $25 a share.And while Wall Street is anticipating a deal, some retail consultants wondered whether Kate would really be that great an acquisition for anyone.Gabriella Santaniello, founder of fashion and retail research firm A-Line Partners and former managing director for retail market research at Wedbush Securities, said, “The problem with Kate is that it has a very [niche] following. It’s been Kate doing the whimsical thing, staying very true to the brand, but the question is ‘What is its longevity?’” She added that the consumer pool at “higher end for Kate would be a lot smaller than Kors or Coach because the latter two are bags you carry forever. With Kate, it’s a different aesthetic.”

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