Luxury handbag maker Coach is buying rival Kate Spade, a brand known for its whimsical designs and colorful patterns, for $2.4 billion in cash, the companies announced Monday.
The deal would bring together two New York-based brands that have competed in recent years to win over younger customers and build a global presence.
“This deal gives Coach a real toehold into the millennial market,” Ed Yruma, a retail analyst at KeyBanc Capital Markets, said.
“Kate Spade can substantially expand in China and Japan – there are so many new opportunities for revenue – and Coach is in a great position to take that on,” Oliver Chen, an analyst at Cowen Group, said. “The fact that Coach has transformed itself before gives it credibility to do it again.”
Coach executives have spent three years trying to persuade customers to think beyond its ubiquitous logo bags and outlet stores. To that end, Coach introduced its 1941 luxury label, acquired shoemaker Stuart Weitzman, added more stores abroad and stopped offering as many discounts. The changes seem to be working: After years of stalled growth, profits and sales are up.
Now executives say they would like to make similar changes at Kate Spade – where 60 percent of sales come from millennials – to turn it into a larger, more global brand.
“The lessons we have learned during our own transformation provide a blueprint for guiding our strategy with Kate Spade,” Victor Luis, chief executive of Coach, said in a Monday call with investors. “We believe our extensive experience in opening and operating specialty retail stores can unlock Kate Spade’s largely untapped global growth potential, notably in Asia and Europe.”
Among his first moves, Luis said, would be to cut back on online flash sales and deep discounts on Kate Spade goods.
“These channels are profitable and can drive growth,” he said but warned that “they can lead to brand deterioration over time.”
On Monday, for example, Kate Spade’s website was touting half-priced cross-body satchels for $149 (“today only!”). Another bag, the Cobble Hill Adrien, was discounted 60 percent from $428 to $171.
“There’s been a vicious cycle of overproducing then discounting prices and hurting your own brand,” said Milton Pedraza, founder of the Luxury Institute, a New York-based research firm. “It will be painful to dial this back – surgical, even – but it needs to be done if Kate Spade is going to become a lean, efficient brand.”
Coach is paying $18.50 for each share of Kate Spade, a 9 percent premium on Friday’s closing price. The deal is expected to be finalized in the third quarter of this year, and executives say they hope to save $50 million by consolidating parts of the business over the next three years.
But while Wall Street seemed pleased by news of the takeover – shares of Kate Spade rose 8 percent Monday, while shares of Coach were up 5 percent – some customers were wary. Kate Spade shoppers took to social media to voice their misgivings.
“WHY WHY WHY UGH,” a user named HellOnHeelsGirl tweeted in response to the news.
“I find Coach to be boring with their brown, unoriginal bags,” tweeted another. “Kate Spade had color and uniqueness! Bye bye pretty bags.”
Coach executives said Kate Spade will remain an independent brand with its own design, merchandising, marketing and sales teams. In addition to handbags and wallets, the company has expanded into jewelry, children’s clothing and homeware.
Kate Spade founded the eponymous brand with her husband in 1993. (She recently legally changed her name to Kate Valentine to coincide with the launch of her new brand, Frances Valentine). The couple sold a majority stake of Kate Spade to Neiman Marcus in 1999. Liz Claiborne bought the brand for $124 million in 2006. (Liz Claiborne was later renamed Fifth & Pacific and is now called Kate Spade & Co.)
In December, the Wall Street Journal reported that Kate Spade began looking for a potential buyer after shareholders said a larger company could help the brand grow faster. Analysts quickly began speculating that Coach would be the buyer.
“This has long been expected,” said Dana Telsey, chief executive of Telsey Advisory Group, a research and consulting firm in New York. “Being part of a larger organization will obviously get [Kate Spade] going where it wants to, faster.”
And, she added, this is part of Coach’s long-term plan to assemble a collection of brands into what it is calling a “New York-based house of modern luxury.”
Coach was reported to have unsuccessfully offered to buy Burberry last year in a deal that would have created a $20 billion powerhouse. It is now reportedly eyeing Jimmy Choo.
“This won’t be the last acquisition for Coach,” Telsey said. “This is part of something much bigger.”
Two years ago, Coach paid $574 million for Stuart Weitzman and hired a former Valentino executive to become the brand’s chief executive. In the quarters since, the luxury shoe brand has turned a steady profit and helped boost its parent company’s earnings.
“With Stuart Weitzman, Coach has demonstrated that it can bring in another brand and nurture it,” said Pedraza of the Luxury Institute. “Now the challenge will be, can they do the same for Kate Spade without watering it down?”