Coach Inc, a handbag maker, has announced that it will acquire Kate Spade & Co at a price of $2.4 billion as it seeks to gain from the popularity of the latter’s products among millennials. The cash deal will see Coach spending $18.50 a share which is a 9% premium as per the closing price of Friday. Boards of the two firms gave unanimous approval of the deal which is slated to close in this year’s third quarter.
Retail sector challenges
Among millennials, the handbags made by Kate Spade have achieved a high popularity status mainly because of their colorful and quirky designs and subtle logos. However, there has been a change in fortunes as a result of fierce competition and a reduction in the number of customers visiting its department stores. But Coach’s chief executive officer Victor Luis has expressed optimism that there was still a lot of opportunity waiting to be exploited.
“Our strongest belief is that middle class will in Europe, in (the) U.S. and especially in developing markets provide us tremendous opportunity. We are very excited that Kate Spade has strength with the millennial consumer,” Luis said in an interview with Reuters.
According to Coach approximately 60% of the customers that patronize Kate Spade are millennials. About 15% of the firm’s revenues are generated from markets outside North America.
Just like has been done with the turnaround strategy applied to Coach, distribution and discounts will be limited. This will involve curbing online flash sales and cutting back on the sales of the handbags to department stores. There will also be an expansion of the brand to markets in Europe and Asia.
After the deal closes, Coach has indicated that it expects to make savings of about $50 million in a period of about three years. These savings will be made through optimization of the supply chain network, improved inventory management and operational efficiencies.
More rumors of other possible buys
Late last year Caerus Investors, a hedge fund, had urged Kate Spade to explore strategic options since the management of the handbag maker had failed to make profit margins that could compare with its peers in the industry. Before Coach acquired Kate Spade there had been rumors circulating that the luxury brand was planning to purchase Jimmy Choo, an accessories label based in the United Kingdom. There had also been speculation that Coach would be acquiring another British luxury brand, Burberry.