Coach Bags Kate Spade in $2B Bet on Millennials

Handbags are displayed in the window of a Coach Inc. store in New York

Handbags are displayed in the window of a Coach Inc. store in New York

NY based design house of modern luxury accessories Coach announced it has signed a definitive agreement to acquire multichannel lifestyle brand Kate Spade.

Coach will pay $18.50 per share of Kate Spade & Co.

Kate Spade, which was founded in 1993 by a former fashion journalist, sells bags priced from $100 to $500, while those of Coach go for $285 to $3,000. "We believe Coach's extensive experience in opening and operating specialty retail stores globally, and brand building in worldwide markets, can unlock Kate Spade's largely untapped global growth potential".

An afternoon recap of the day's most important business news, delivered weekdays. The investment firm said that while the company is generating solid growth, it needs better management to help boost its profit margins.

Known for crisp color, graphic prints and playful sophistication, Kate Spade's handbags are popular among millennials for its sleek and modern design.

In tune with Coach's turnaround strategy, which includes limiting discounts and distribution to regain its brand cachet, the company will cut back Kate Spade's sales to department stores and curb online flash sales while expanding the brand's presence in Asia and Europe.

The acquirer said it expects to shed $50 million in annual costs within three years after completing the deal.

Kate Spade likewise stepped up its China expansion in 2015 when it founded a new joint venture with Walton Brown, a company of the fashion retail and brand management group Lane Crawford Joyce. "This isn't about bringing Kate Spade into Coach stores", he said on a webcast this morning. Additionally, in February, Kate Spade confirmed it was considering "strategic alternatives" for the company's future.

The company has no other big acquisitions in the short-term pipeline, Luis said on a conference call Monday after the deal was announced.

As we mentioned in our report from last week, we think M&A makes sense for Coach.

For watchers of Coach under CEO Victor Luis, who assumed the leadership position in January 2014, the play for Kate Spade isn't a shocker.

Noel Hebert, a credit analyst at Bloomberg Intelligence, said United Kingdom clothing retailer Ted Baker "fills a few strategic buckets" for Coach, because of its growth potential and European focus.

But sales per square foot at stores open at least a year fell 2.4% in the 12-month period ending October 1, underscoring the retailer's challenges, including a sluggish luxury market, lower growth in China and unfavorable currency rates.

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