Kate Spade & Co. surged the most in more than four years Wednesday after Dow Jones reported that the maker of luxury handbags -- which had been under pressure from an activist investor -- is working with bankers to explore a sale.
Shareholder Caerus Investors had pushed the company last month to find a buyer that could help it improve its profit margins. Kate Spade is now working with an investment bank and has reached out to potential buyers, Dow Jones reported Wednesday, citing people familiar with the matter.
The report indicates that the fashion house is moving forward with a sale that had been a topic of industry speculation for more than two years. The company -- formerly named Fifth & Pacific -- had been seen as an attractive takeover target ever since it sold the Juicy Couture and Lucky brands in 2013 and 2014, leaving Kate Spade as its sole major nameplate. It instead embarked on a plan to become a lifestyle brand selling everything from apparel to home goods, similar to Ralph Lauren Corp., with a goal of quadrupling revenue to $4 billion annually.
Kate Spade has the potential to reach that sales target and expand its profit margins, meaning it could fetch a price $21 to $23 a share in an acquisition, Betty Chen, an analyst at Mizuho Securities, said in a note Wednesday. That would mark a premium of roughly 45 percent to 60 percent from the shares' closing price on Tuesday.
"The growth profile coupled with the brand's unique appeal to millennials and broad-based success across categories ranging from handbags to apparel and jewelry could be attractive to many buyers," said Chen, who named Coach Inc. as a potential suitor.
Kate Spade shares surged $3.35, or 23 percent, to close Wednesday at $17.86 in New York. The stock had dropped 18 percent this year through Tuesday.
Emily Garbaccio, a spokesman for Kate Spade, declined to confirm or deny the Dow Jones report, saying in an email that the company doesn't comment "on industry rumors or speculation."
Last month, Caerus sent a letter to Kate Spade saying shareholders were "incredibly frustrated" with its performance and that investors would be better off if it was sold to a buyer who could better manage the business.
Like competitors Coach and Michael Kors Holdings Ltd., Kate Spade has been working to reduce its reliance on promotions and sell more products at full price to maintain its brand's image. The U.S. luxury industry has suffered from falling sales in recent years, caused by a decline in mall traffic and the rise of e-commerce. The industry's weakness has fueled speculation that major brands have considered combining, rather than fighting it out alone.
Caerus has said it first invested in Kate Spade in 2009, when it was owned by parent company Liz Claiborne. It didn't disclose the size of its stake when it released the letter last month.
Business on 12/29/2016