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The winners and losers in a Coach-Kate Spade acquisition

March 29, 2017

With reports swirling that Coach’s acquisition of Kate Spade is imminent, what would a merger of two of the leading American handbag brands look like?

“Coach has viability again,” said Jessica Ramirez, retail analyst at boutique firm Jane Halli & Associates. “Now, they’re targeting millennials and looking to further elevate the brand. For Kate Spade, Coach could do for it what they did for Stuart Weitzman.”

Coach, which acquired footwear brand Stuart Weitzman for $574 million in 2015, has been undergoing a restructuring since annual sales dipped as low as $4.1 billion in 2015, down from $5.1 billion in 2013. Now that sales have started to turn around, up 7 percent over last year, the company is exploring the Kate Spade acquisition as an avenue for accelerating growth.

Kate Spade & Company, meanwhile, announced with its 2016 annual results in early February that it was reviewing strategic alternatives, including exploring potential buyers. Last year, Kate Spade & Company pushed brand growth both by category, when it introduced 14 new products mostly in the home goods industry, and by geography, citing big opportunity for expansion in Japan and Europe. However, its growth has been bogged down by the closing of trendy line Saturday and a rolling back of Jack Spade brick and mortar.

Final bids for Kate Spade & Company were due on Monday. While both Coach and Kate Spade declined to comment on the speculation, here’s a rundown on the anticipated winners and losers of a potential Kate Spade and Coach merger.

Winner: Direct-to-consumer
During February’s earnings call with investors, Kate Spade & Company CEO Craig Leavitt talked up the company’s shift to a direct-to-consumer business model.

“Our direct-to-consumer and channel-agnostic approach has helped grow business faster than peers,” Leavitt said. “E-commerce is our fastest growing channel.”

Over the past year, both Kate Spade and Coach have pulled products from department store partners that were continuously marking down item prices and harming the brands’ reputations as contemporary luxury. Coach opened a flagship store in New York, offering a personalization station and in-house tailoring, to reclaim its brand appearance. Kate Spade, meanwhile, has reported e-commerce growth, but slowed down brick-and-mortar sales. From its fourth quarter earnings report, same-store sales at Kate Spade fell 1.5 percent, but overall direct-to-consumer sales were up 9 percent when accounting for e-commerce.

While shifting away from wholesale and re-emphasizing the core brand is appealing for brands who have grown tired of department store promotions, operating a direct-to-consumer business solo isn’t easy.

“It’s become more complex for small brands to run a business,” said Rony Zeidan, CEO and founder of the agency RO NY. “You see brands shifting from wholesale to direct to consumer, which puts them in control, but that comes with budget. Not everyone can pull that off.”

Bringing Kate Spade under the Coach umbrella would fortify the direct-to-consumer model for both brands.

Loser: Michael Kors
As soon as it became clear that Kate Spade would be up for sale in November (when New York hedge fund Caerus Ventures, an investor in the company, pushed for the action), Coach and Michael Kors surfaced as two candidates that could acquire the brand.

A pairing with Michael Kors, a $6 billion company, compared to Coach, worth $11 billion, would have had the appearances of a move of desperation on both sides.

“It makes a lot more sense for Coach than Michael Kors,” said Ramirez. “Coach has a better image right now. It feels more strategic than desperate. I would feel differently, though, if it was Michael Kors.”

Coach has shown that it has the tools in place for a proper turnaround, making a Kate Spade acquisition a more strategic move, rather than a joining of two weaker brands.

Winner: Kate Spade’s modern customers
It’s hard to make everyone happy, but a Kate Spade and Coach pairing would have positive effects on Kate Spade’s product line.

Known for its polka dot prints, bright colors and bows, Kate Spade items are easy to pick out in a lineup. In its journey to becoming a more lifestyle-oriented brand, it has added home goods, tech accessories, bathing suits and activewear to its lineup of handbags and accessories — something that will open up access to new customers at different stages of life for Coach.

Both Coach and Kate Spade have embraced the power that customers today yield within an aspirational brand. “Deborah [Lloyd, Kate Spade’s creative director] and I, we aren’t the people we’re designing for or doing marketing for. It’s the customer,” said the brand’s CMO Mary Renner Beech in a previous interview. Coach creative director Stuart Vevers made a post-show statement in September that the brand was ready to adopt to a new idea of luxury:

“Luxury to the next generation could mean a T-shirt or fun playful backpack, and I want Coach to stand at the forefront of the new codes of luxury that are being created right now,” he said.

However, unlike Coach, Kate Spade has leaned heavily on the kitsch without keeping up with customers driven by more modern styles. While Coach has eased back on plastering its name and logo on its bags, and updated its product styles (including the new bestselling collection Coach 1941), Kate Spade’s bags still boldly proclaim who it’s made by. Similar to the way Coach’s designers tweaked Stuart Weitzman’s products when it purchased the brand, customers can expect some promising updates to the product line.

Loser: International expansion

However, a product update and the efforts of folding in Kate Spade’s numerous categories could slow down the emphasis on international growth for both Kate Spade and Coach. Right now, international sales account for just under 15 percent of Kate Spade’s sales.

“In the long run, I think it could be good for international growth, but that won’t be the first thing they’ll tackle,” said Ramirez. “Figuring out that product should be the first priority.”

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