Kate Spade & Co. has attracted interest from high-end rivals Coach Inc. and Michael Kors Holdings Ltd., since the handbag-maker put itself up for sale in February, according to people familiar with the matter.
So the company's first quarterly sales decline in almost eight years couldn't have come at a worse time. The poor earnings report this week could weaken its bargaining power in an eventual sale.
"It would make more sense for a would-be acquirer to be much more aggressive about the valuation because of the numbers they just put out," said Adrienne Yih, an analyst at Wolfe Research. "That would allow Coach to get a better deal."
Like most retailers, Kate Spade is facing weakening mall traffic, online competition and a drop in tourist spending. But the company is also coping with the added burden of pressure from shareholder Caerus Investors, a hedge fund pushing for a sale.
On Tuesday, Kate Spade reported a 2.4 percent decline in same-store sales, a closely watched gauge. It was the first drop since the third quarter of 2009, according to data compiled by Bloomberg, and worse than analysts' average estimate of a 4.5 percent increase.
"Results will likely give bidders pause and result in a more sober purchase multiple if a transaction materializes," Randy Konik, an analyst at Jefferies Group LLC, said in a note.
Kate Spade has also pulled back from department stores, which have dramatically marked down handbags to get rid of unsold items. Instead, the company is focusing on the 423 stores where it sells to consumers directly. Kate Spade and competitors like Coach say the discounts have eroded their brands.
To drive sales and entice shoppers to pay full price, Kate Spade is introducing new handbag designs and diversifying into home goods, ready-to-wear apparel and fragrances. It has also started personalized services.
Over the past two decades, Kate Spade has gone from hip downtown New York fashion circles to mainstream malls. Founded in 1993 by Mademoiselle magazine editor Kate Spade and her husband, Andy, the handbag-maker won a small but loyal following by melding vibrant color with classic lines. The brand lost luster after Neiman Marcus Group bought majority control in 1999. Liz Claiborne acquired the company for $124 million in 2006, and the Spades left.
Called Fifth & Pacific, the combined company included the Juicy Couture and Lucky brands. In 2013, seeking to focus only on Kate Spade, Fifth & Pacific sold Juicy's intellectual property to Authentic Brands Group LLC and Lucky to Leonard Green & Partners LP. In 2014, it changed its name to Kate Spade & Co., and it's been seen as an attractive takeover target ever since.
The new stand-alone company has embarked on a plan to become a lifestyle brand selling everything from apparel to home goods -- similar to Ralph Lauren Corp. -- with a goal of quadrupling revenue to $4 billion annually.
Caerus is less optimistic. In November, the hedge fund sent a letter to the company saying shareholders were "incredibly frustrated" with its performance and that investors would be better off if it were sold to an acquirer who could better manage the business. Kate Spade in February said its board was reviewing strategic alternatives. On Tuesday, the company said there's still no timing on how long discussions could take and that there was no assurance the review would result in a transaction.
Kate Spade's shares initially surged on takeover speculation, but have tumbled 22 percent since April 3, when a Reuters report raised concern that talks could be dragging on and might lead to a lower price.
Women's Wear Daily said in March that Michael Kors may no longer be involved in the deal, while Reuters reported that Kate Spade will spend a few more weeks negotiating a potential sale after receiving an offer from Coach. If a sale is successfully negotiated, the price would likely come in below Kate Spade's $2.9 billion valuation at that time, Reuters said. The company has a market capitalization of about $2.29 billion. The stock fell 34 cents, or 1.9 percent, to close Friday at $17.54.
Kate Spade declined to comment, and Caerus didn't return messages seeking comment.
Coach is unlikely to overpay for Kate Spade because the New York-based company is disciplined about managing return on its invested capital, said Oliver Chen, an analyst at Cowen & Co. Kate Spade could fetch an offer price in the range of $22 to $25 a share, he said.
That is lower than the price floated by Caerus founder Ward Davis, who said in February that Kate Spade could be worth "in the high $20s or low $30s," depending on the number of bidders.
Business on 04/22/2017