Shares of Kate Spade & Co. on Wednesday jumped 23.1 percent on rumblings that it is exploring the idea of a sale of the company amid pressure from an activist investor.
A spokeswoman for the company said, “As a company policy, we do not comment on industry rumors or speculation.”
The news that the company was considering putting itself up for sale isn’t a surprise. New York-based hedge fund and activist investor Caerus Investors on Nov. 14 sent the company’s chairman a letter pushing for a sale of the firm. The letter urged the divestiture under the rubric of creating shareholder value. The fund, managed by Ward Davis and Brian Agnew, expressed concern in their letter that the women’s handbag and accessories firm has been underperforming its peers, which in turn has led to a decline in the stock price.
Shares of Kate closed at $17.86 in Big Board trading. Over 22.4 million shares changed hands compared with a three-month average trading volume of nearly 2.9 million shares. Kate’s shares have dropped about 21 percent in the past 12 months. The rise in Kate’s shares came on a day when the Dow Jones Industrial Average fell nearly 0.6 percent, or 111.4 points, to 19,833.68.
The Caerus letter also said, “We think Kate Spade would make a great acquisition candidate for a strategic company in the lifestyle accessories category.” The letter went on to say that the fund “strongly believe[s] that a strategic, industry player would be willing to pay a substantial premium to add this growth business to their portfolio.”
The hedge fund said it first invested in Kate Spade in 2009, when it was a brand under the umbrella of Liz Claiborne. It argued back then for a break-up of the company, which later occurred in 2013.
When it was disclosed in November that Caerus sent its letter to Kate Spade chairman Nancy Karch, shares of Coach rose 2.7 percent as market speculation pegged Coach Inc. as a possible acquirer. Coach’s chief executive officer Victor Luis has openly disclosed to Wall Street that his company is on the prowl for an acquisition for which it can leverage its back office and sourcing capabilities.
Mizuho Securities USA Inc. analyst Betty Chen said Spade could be valued as high as two times enterprise value/sales or 14 times enterprise value/earnings before interest, taxes, depreciation and amortization, implying a share price at $21 to $23. She considered relevant transactions as comparables the 2 times EV/Sales Coach paid for Stuart Weitzman, and the 14x EV/EBITDA Samsonite paid for Tumi.
“We believe the growth profile coupled with the brand’s unique appeal to Millennials and broad-based success across categories ranging from handbags to apparel and jewelry could be attractive to many buyers, including Coach, which was rumored to be evaluating the company in recent weeks,” Chen said.
Chen also noted favorable holiday checks, with discount levels between 5 to 10 percent higher year-over-year, outlet promotions average 60 to 70 percent off and retail stores offering 30 percent off the entire collection. She said the promotions are “likely consistent with management’s plan to gain market share amidst a highly promotional environment.” Chen also said, “We are encourage the strategy appears to be resonating as we observed shoppers purchasing tech accessories, totes, cross-body bags and jewelry.”
She also noted: “We had been pleased to see Google Trends rise dramatically during the key Thanksgiving time frame to match last year’s peak levels. Since then, Google Trends suggest increased search interest post-Dec. 25, which may be reflective of self-purchases and more indicative of brand resonance.” Chen added that e-commerce represents about one-third of the company’s same-store sales calculation, and she expects “strong online conversion to contribute to our total comp forecast of plus-8 percent in [the] fourth quarter.”
The Wall Street Journal reported that the company is working with an investment banker, which has already reached out to possible buyers.
There are other firms that could also be interested, both in the U.S. and abroad. Michael Kors Holdings Ltd. has been said to be on the prowl for an acquisition. And G-III Apparel Group Ltd., which just acquired Donna Karan and DKNY, is also continuously looking to add to its brand portfolio. With about a $2.3 billion market capitalization currently, Kate is still a growing business, one that can provide foreign buyers with another entry point in the U.S., and they in turn can provide Spade with some know-how for its international expansion. And there are still the financial sponsors, many of which still have money that they need to put to work.
Wells Fargo analyst Ike Boruchow said the news that the company is considering a sale comes at a time when brands such as VF Corp., PVH Corp., Hanesbrands Inc., Kors and Coach have all said they are looking to acquire a brand, and he concluded that “Kate could be one of the strongest candidates.” He said the brand is “relatively healthy,” and that it continues to have opportunity to expand its wholesale distribution.
In the most recent quarter, Kate Spade posted results for the third quarter ended Oct. 1 that beat Wall Street’s consensus estimates. Net income grew to $29.6 million, or 23 cents a diluted share, from $2.3 million, or 2 cents, a year ago. Diluted EPS from continuing operations was 13 cents. The company a year ago was in the midst of winding down certain businesses. Net sales rose 14.1 percent to $316.5 million from $277.3 million, while direct to-consumer comparable sales growth was up 6.7 percent. Wall Street was expecting EPS of 9 cents on sales of $310.9 million.
Be segment, Kate Spade North America net sales were up 13.7 percent to $260 million. Kate Spade International net sales rose 18.9 percent to $51 million. The company’s Adelington Design Group saw sales slip 2.2 percent to $6 million.
Craig A. Leavitt, Kate’s chief executive officer, has said that the company is committed to “become a $4 billion business at retail.”
At the end of the third quarter, the company had 175 company-owned stores in North America — 108 specialty stores and 67 outlet stores — and 93 overseas, which included 25 specialty stores, 14 outlets and 54 concessions. There were also 92 partner-operated stores and 42 Greater China joint venture stores.