Coach will buy Kate Spade

kate-spadeAccessories and fashion brand Coach will buy Kate Spade & Co for US$2.4 billion in a deal announced months after rumours first surfaced of a buyout.

Analysts consider the price to be in Coach’s favour, despite being at a premium to Kate Spade’s share value when the deal was first speculated on December 27.

Coach CFO Kevin Wills said the synergies between the two businesses should bring US$50 million in cost savings three years after the deal is settled, most likely in the third quarter. Coach will improve scale and inventory management and streamline Kate Spade’s supply chain.

Neil Saunders, MD of GlobalData Retail, described Coach’s move as “prudent and logical” given the US company’s success in integrating the Stuart Weitzman business and reinvigorating its own brand over recent years.

“Coach has recently run the ruler over a number of businesses including Burberry and Jimmy Choo. In our view, this [Kate Spade] deal is sensible both in terms of the brand fit and the premium that Coach is paying.”

Saunders said Kate Spade has significant potential mainly because it is in the early stages of developing its own lifestyle brand, mostly by expanding into new product areas.

“Current management has made good progress, but we believe that Coach can add further value on the sourcing and distribution side, as well as some fresh thinking on the design front. It can also bring its experience of reinvigorating a brand to some aspects of Kate Spade’s operation which, over recent quarters, have become too reliant on discounting and promotions. There will be reasonable scope for synergistic savings which, in addition to the sales benefits, will help Coach to generate a good return on investment.”

Saunders believes the overlap between the two brands is insignificant, with Kate Spade’s focus on a younger consumer that Coach has some difficulty in attracting.

“This means the deal will allow Coach to expand, at a stroke, its customer base. The purchase also prevents the Kate Spade brand falling into the hands of a rival like Michael Kors; while this is not the prime driver of the acquisition, it is nonetheless a helpful side benefit.”

But Saunders warned that for the deal to be successful, a degree of separation between the two businesses is needed.

“The brands must remain distinct, which means the creative thinking and strategy of both businesses cannot become too intertwined. It is also the case that the main Coach brand, while in much better health, still needs much nurturing and care in a very tough environment; as such the company will need to keep a dual focus on both its new and established businesses.

“Ultimately the aim for Coach is to become a business with a portfolio of distinct and compelling luxury brands. Today’s announcement is the solid step on that journey.”

This story first appeared on sister site, Inside Retail Asia.

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