The past couple of years have been busy ones for Coach. The company has undertaken a turnaround of its main brand, successfully bringing back a premium edge to what had become a ubiquitous and devalued name. Coach has also integrated the Stuart Weitzman business by both extracting operating efficiencies and creating new sales opportunities.
While these initiatives have not yet run their full course, they are reaching maturity. As such, the growth they will deliver over the next few years will become more limited – especially in North America where Coach does not want to make the same mistake of overexpansion that plagued it prior to the brand reinvention.
Given this backdrop, we believe that the company’s desire to make an acquisition is both prudent and logical.
Coach has recently run the rule over a number of businesses including Burberry and Jimmy Choo. However, it has now plumped to buy Kate Spade for $2.4 billion. In our view, this is a sensible deal both in terms of the brand fit and the premium that Coach is paying.
As a business, Kate Spade has significant potential mainly because it is in the early stages of developing its own lifestyle brand, mostly by expanding into new product areas. Current management has made good progress, but we believe that Coach can add further value on the sourcing and distribution side, as well as some fresh thinking on the design front. It can also bring its experience of reinvigorating a brand to some aspects of Kate Spade’s operation which, over recent quarters, have become too reliant on discounting and promotions. There will be reasonable scope for synergistic savings which, in addition to the sales benefits, will help Coach to generate a good return on investment.
Although there is some overlap between the Coach and Kate Spade customers this is not significant, and Kate Spade’s focus is on a younger consumer that Coach has some difficulty in attracting. This means the deal will allow Coach to expand, at a stroke, its customer base. The purchase also prevents the Kate Spade brand falling into the hands of a rival like Michael Kors; while this is not the prime driver of the acquisition, it is nonetheless a helpful side benefit.
As much as we are positive about Coach’s move on Kate Spade, we believe successful execution will require a degree of separation between the two businesses. The brands must remain distinct, which means the creative thinking and strategy of both businesses cannot become too intertwined. It is also the case that the main Coach brand, while in much better health, still needs much nurturing and care in a very tough environment. As such, the company will need to keep a dual focus on both its new and established businesses.
Ultimately the aim for Coach is to become a business with a portfolio of distinct and compelling luxury brands. Today’s announcement is the solid step on that journey.