The handbag wars are not for the faint of heart.
Kate Spade (KATE) confirmed on Thursday recent news reports that it is exploring “strategic alternatives,” corporate speak for saying it is up for sale or open to another arrangement that could boost its lagging share price.
The fashion retailer’s shares rose 10% on the news, which overshadowed a fourth-quarter report that showed revenue falling short of Wall Street analysts’ forecasts. Yet despite the jump, the stock remains 50% below its all-time highs in late 2006.
CEO Craig Leavitt said in a statement that Kate Spade is “exploring strategic alternatives that are in the best interests of our Company and shareholders.” However the company said it would proceed “in a timely matter” without setting a timeline.
For years, Kate Spade was one of the fastest growing retailers, riding the handbag boom that also lifted rival Michael Kors (KORS) until about a year ago. An abrupt change in consumers’ tastes in handbags, away from larger ones to smaller cross-body bags, which are less expensive, has been a challenge Kate Spade has navigated better than others.
But some investors have been concerned that Kate Spade is too small a brand to be a stand alone. Indeed, activist firm Caerus Investors has been pushing Kate Spade to seek a larger buyer, prompting speculation Kors or Coach (OH) could be suitors.
In a letter sent to Kate Spade’s board in November, Caerus said it was “increasingly frustrated” by the inability of Kate Spade ‘s management to achieve profitability comparable to industry peers. “The company’s margins are well below peers with material opportunity for expansion as licensing revenues grow and the business scales over time,” Caerus said in its letter. “A potential buyer would be able to realize material cost and revenue synergies over time.”
Still, Kate Spade has been posting better numbers than its immediate rivals. Comparable sales in the fourth quarter at its own stores were up 9.3%, compared to a 6% drop at Kors and a 3% increase at Coach. Total sales rose roughly 10% to $471 million, below expectations of $472 million, according to Thomson Reuters. Kate Spade in November had warned investors that Kate Spade it expected pricing competition to dampen its holiday quarter profits.
Both Coach and Kors have been working on repairing their quasi-luxury image but exiting many department stores and pulling out of their sales events, as well us reducing the number of sales events they hold and pushing higher quality bags. Coach has now reported three straight quarters of North American growth.
Kate Spade changed its name from Fifth & Pacific Cos three years after that holding company sold off its Juicy Couture and Lucky Brand labels. It had been previously known at Liz Claiborne.