Despite a so-so first quarter, there’s still a chance a deal could get done for Kate Spade & Co. — or at least one that shareholders would perceive as a decent takeout price for a company whose shares got ahead of themselves in anticipation of a bid.
Activist investor Caerus Investors pushed the accessories brand to put itself up for sale in November. At the time, shares of Kate Spade were trading in the $17.93 range. Eventually the shares rose to a high of $24.24 on March 1 as rumblings began circulating that bids were due and a deal could be near, with speculation one could be done by midsummer at $24 or $25 a share.
But when a forthcoming offer doesn’t match expectations of a premium takeout price — Coach Inc. is believed to have submitted an offer, while Michael Kors Holdings hasn’t yet, and may not, submit one — reality sets in. And so does managing shareholder expectations. Earlier this month, Kate Spade held off on any decision regarding a deal for a few weeks, saying it needs more time to negotiate a sale of the company. That decision sent shares of Kate Spade down 6.4 percent to close at $18.16.
The company’s first-quarter results on Tuesday won’t do anything to boost the share price. For the three months ended April 1, net income was $1.4 million, or 1 cent a diluted share, compared with $11.6 million, or 9 cents, a year ago. The firm posted $7 million in pretax store impairment charges and $2 million in pretax fees and expenses connected with its review of strategic alternatives. Even though sales in the quarter fell just 1.4 percent, that still represented the first drop in 25 quarters. Further, direct-to-consumer comparable sales were down 2.4 percent from a year ago, the first decline since 2010. Wall Street was expecting earnings per share of 7 cents on sales of $299.8 million.
With Tuesday’s close, at least doing a deal now doesn’t look like anyone would be overpaying for the brand.
Wells Fargo’s Ike Boruchow said even though the 2.4 percent comps miss was below Wall Street’s estimates of up 3.3 percent, the decline was on top of an 18.8 percent comps gain a year ago, what he called the “toughest compare of the year which on a two-year basis, implies a run rate of mid- to high-single-digit comp for the rest of the year.”
He added that the company’s gross margins were better than expected, at up 150 basis points compared with analysts’ forecasts of down 150 basis points. That implied the business relied more heavily on full-price selling, whereas in the past Kate Spade had been prone to accelerating markdowns, Boruchow said.
The analyst concluded that “interested parties are likely not scared away by these results, as the quarter is better than it appears on the headline.”
Randal J. Konik, equity analyst at Jefferies, said Kate Spade’s results “will likely give bidders pause and result in a more sober purchase multiple if a transaction materializes.”
In a research note on Coach, he said that company would be a more logical acquirer of Kate Spade than Kors given the relative valuations and Coach’s track record of integrating acquisitions. He presumed that Coach pays a 10x earnings before interest, taxes, depreciation and amortization multiple for Kate Spade, down from 11.5x given the weaker fundamentals, with an enterprise value in the $3.1 billion range and a $20 a share purchase price. “We have assumed Coach will finance 25 percent of the deal with stock, issue $1.8 billion in new debt [and] utilize $500 million of cash.”
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