Designer fashion accessories seller Coach said Monday that it has bagged upscale rival Kate Spade in a $2.4-billion deal that reflects a luxury goods market grappling with sluggish sales.
Coach said Kate Spade will continue as an independent brand with its own stores. Kate Spade's connection with Millennials, who represent 60% of its customers, and international growth potential appealed to Coach. Both companies are known for their pricey high-end handbags as well as apparel and women's shoes.
"It is a strong brand with a clear and consistent positioning, with leadership in the attributes of fashionable, fun and feminine, and a growing share of Millennials," Coach CEO Victor Luis said in a conference call.
Although Luis said Kate Spade would be afforded the autonomy to make its own design and marketing decisions, he said the company had become "too dependent" on online sales and wholesale distribution.
Those channels "can lead to meaningful brand deterioration over time," and Coach will cut back on both, Luis said.
Investors in both companies cheered the deal. Coach is paying $18.50 per share for Kate Spade, 27.5% more than the stock was worth on Dec. 27, before rumors of a possible deal surfaced. Kate Spade share closed up Monday at $18.38, up $1.41 or 8.3%. Coach shares closed at $44.71, up $2.05 or 4.1%.
Coach said it expects to shed $50 million in annual costs within three years after completing the deal. That will include "supply chain optimization" and elimination of overlapping costs, Chief Financial Officer Kevin Wills said. Coach ended the period with 228 retail stores and 204 outlet stores in North America, 522 Coach locations internationally and 75 Stuart Weitzman stores.
Coach said it had identified global expansion opportunity through opening Kate Spade specialty stores.
Globally, Kate Spade has 133 specialty stores, 82 outlet stores and 54 stores similar to franchises exclusively in foreign markets. The company opened 52 new locations in 2016, which helped boost net income and overall sales. But sales per square foot at stores open at least a year fell 2.4% in the 12-month period ending Oct. 1, underscoring the retailer's challenges, including a sluggish luxury market, lower growth in China and unfavorable currency rates.
While Kate Spade has been expanding, Coach has been reducing its own retail footprint in North America, where the company closed 30 retail stores in the fiscal year ended July 2.
Kate Spade CEO Craig Leavitt told investors that the deal will allow the brand to "achieve long-term success" after working "hard to create a clear and distinct brand identity, differentiated storytelling and great products."
Luis said there "may be some slight opportunities" to close stores in markets where the two retailers compete, "but we see it as very, very minimal." He said 35% of Kate Spade stores overlap with Coach locations.
Among the growth opportunities is China, where only 1% of consumers can name the Kate Spade brand without prompting, while 23% can name the Coach brand, Luis said.
The deal is "somewhat surprising" because it comes as Coach's "turnaround plan seems to be taking hold," CFRA Research analyst Tuna Amobi said in a bulletin.
Kate Spade had confirmed in February that it was considering "strategic alternatives," as the handbag, clothing, shoes and accessories seller faces a strong U.S. dollar that is dampening foreign tourist spending.
The companies said their boards had unanimously authorized the deal, which they expect to close in the third quarter.
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