Could Michael Kors or Coach buy Kate Spade?

Struggling handbag maker Kate Spade & Co. is up for sale and, according to market reports, fellow accessible luxury brands Michael Kors and Coach are possible suitors. But which company, both struggling with a stagnating global handbag market, is best positioned to make the acquisition? And does the deal make sense for either of them?

The reports come after US hedge fund Caerus Investors urged Kate Spade, which has a market value of just over $2.3 billion, to consider a sale, expressing frustration at the company’s inability to achieve comparable profit margins vis-à-vis its rivals. For the three months ending October 1, 2016, Kate Spade’s gross profit margin was 59.4 percent, compared to 69.8 percent for Coach over the same period.

Acquiring Kate Spade could potentially help either Michael Kors or Coach drive growth in a time of difficulty, as they face stagnating global sales of handbags — the bread-and-butter product for both brands — as well as a challenging US retail market, hurt by declining department store sales. For one, Kate Spade has diversified away from apparel and accessories in recent years, introducing 14 new, predominantly home-focused product categories in 2015, including bedding, furniture and kitchenware.

While Coach’s turnaround plan has been gaining traction thanks, in part, to the deft merchandising skills of creative director Stuart Vevers, the brand continues to struggle to drive growth and results remain soft. For the first quarter of 2017, Coach reported sales of just 0.7 percent to $1.04 billion, missing analysts’ estimates of $1.07 billion. However, the company is slowly making progress and, on Tuesday, reported a 17.4 percent rise in quarterly profit helped by stronger sales in China and Japan and a strategic shift away from discounting.

While Michael Kors is yet to report earnings for its fiscal third quarter, which are expected on February 7, its last results for the quarter ending October 1 showed total revenue for the group fell by 3.7 percent to $1.09 billion. This was down from $1.13 billion for the same period a year earlier, falling short of analyst expectations. The company also said revenue in the Americas fell by 11.1 percent, one of its largest markets.

Coach is better positioned than Michael Kors to buy Kate Spade, believes Luca Solca, head of luxury goods at Exane BNP Paribas, who says the deal would make use of the brand’s significant cash pile and also improve its growth prospects.

And while Michael Kors has no history of acquisitions, Coach has been successful with this approach in the past, purchasing footwear brand Stuart Weitzman in 2015 for $574 million to boost sales and diversify its product offering.

As a lifestyle brand, Coach is also more closely aligned with Kate Spade than Michael Kors, which is predominantly focused on apparel and accessories, and is a more personality-driven company that relies closely on its designer for its identity.

What’s more, Coach also has a proven ability to successfully bring on top design talent to instigate a creative overhaul, something which Kate Spade — whose overly colourful aesthetic and tongue-in-cheek designs have evolved little over the last few years and have fallen out of favour with younger consumers — desperately needs. Indeed, in 2013, Coach tapped Vevers to breathe fresh life into the brand and, more recently, appointed renowned accessories designer Giovanni Morelli to lead Stuart Weitzman.

But would Kate Spade be a good acquisition for either Michael Kors or Coach?

Certainly, there is potential to expand the Kate Spade brand abroad. Currently, the Americas account for 83 percent of its total global revenues. Kate Spade’s homeware and athleisure offerings could also benefit both Coach and Michael Kors, who are absent in these categories, especially as department stores shift their product mix towards lifestyle and away from apparel.

But Kate Spade is also facing many of the same problems that have plagued both Michael Kors and Coach. All three brands have been hit by diminishing margins from over-promotion in outlets and discount-heavy department stores, over-saturation in the American market and waning relevance amongst millennial consumers — a key growth driver for accessible luxury brands — who are losing interest in “it” bags.

Although Kate Spade has enjoyed stronger growth rates than either of its potential purchasers, reporting a 14 percent increase in sales for the third quarter of 2016 in November, shares of the brand have plummeted over 40 percent since 2013 as it has struggle to keep up with its ambitious plans to reach over $4 billion in sales. In 2015, it shuttered its diffusion brand, Kate Spade Saturday, and also closed all standalone stores for Jack Spade, its menswear brand.

Should Coach or Michael Kors aim to accelerate Kate Spade’s expansion both at home and abroad, they could potentially fall victim to many of the same issues that have hurt their own businesses, says Luca Solca.

“The middle class driving luxury demand worldwide is a big structural positive for accessible luxury brands,” he says. “The problem they have is that of maintaining perceived exclusivity and desirability, as they typically grow too broad and too fast.”

adapted from BOF

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