Could Coach Inc. Be A Takeover Target?

The latest takeover speculation in the highly competitive handbag industry is of Coach (NYSE:COH) as an acquisition target. A news alert from Benzinga Lightning Feed, an aggregated feed used by a number of traders, reported that French luxury company Kering had made a takeover bid for Coach on March 15, 2017. Shortly following this, the stock price of the company rose 2%, even rising 2.6% to $39.97 during the course of the day, before closing slightly lower at $38.86. A spokesperson for the company refused to comment on the rumors, and there has been no filing with the Securities and Exchange Commission confirming any official offer.

Speculative Luxury Industry

This news comes on the back of rumors that Michael Kors and Coach are among the companies that have made it to the second round of bidding for Kate Spade, although they face competition from other bidders, including a non-US party. Handbag and accessories retailer Kate Space recently confirmed speculation that it is exploring strategic alternatives for its business, and is reported to be working with a bank to contact possible buyers, including other retailers, CNBC reported, citing Dow Jones. The company was said to be under pressure from an activist shareholder, Caerus Investors, that had pushed the company to find an acquirer in order to improve its profit margins. The time of the sale would be opportune, with many companies, such as Coach, Michael Kors, PVH Corp., and VF Corp., all looking for acquisitions.

This isn’t the first time Coach has been a part of such deal speculations. Even in 2014 and 2015 there were rumors that Kering may be involved with a takeover bid for the company. Tiffany and LVMH Moet Hennessy Louis Vuitton have also been part of the rumor mill with regards to Coach. As recently as last year, a merger between Burberry and Coach was also making the rounds. At that time, while representatives at both the companies declined to comment, the Financial Times had reported earlier in the year 2016 that Burberry had asked its advisers at Robey Warshaw to help prepare a defense for a possible bid. It was reported at that time that a mystery investor had built up a stake of close to 5%, prompting the company to attempt, albeit unsuccessfully, to ask HSBC, which is listed as the custodian for the position, to disclose its client or clients.

According to Luca Solca, analyst at Exane BNP Paribas, historically, mergers and acquisitions in the luxury sector have not particularly helped in regaining brand traction and desirability. The reasons for the possible merger with Burberry were also being questioned, with many speculating it could be for cost-cutting. This, however, has been the downfall for numerous mergers, as many fail when the companies underestimate the complications associated with integration, while overestimating the benefits that can be derived from synergy.

Coach’s Improved Performance

Coach posted its second quarter earnings on January 31, 2016. Amid a challenging and volatile global retail environment, the company was able to deliver top line growth in each of its segments, highlighted by positive comparable sales in North America, and overall gross margin expansion. Despite the department store pullback, the retailer witnessed double digit growth in the earnings. While the revenue was in line with the consensus expectations, the company beat the earnings per share estimates by a penny. Furthermore, a breakdown by Market Watch of the S&P 500 companies noted that only two retailers, namely Coach Inc. and O’Reilly Automotive, reported positive comparable sales in the December quarter, a gross margin of at least 50%, and a net income of at least 10% of sales.

Coach has been working hard to transform its brand in recent years, in the wake of market share loss to Michael Kors and other rivals, who also employed Coach’s strategy of selling luxury products at affordable prices. The company hired a new designer, Stuart Vevers, who introduced higher end products and undertook to remodel the stores. The retailer has also recruited Selena Gomez to be their new face, in order to appeal to the younger shoppers.

During its fourth quarter and financial year 2016 (ended June), Coach announced its decision to pull the company’s handbags and leather goods out of 25% of department stores, or by over 250 locations, a move which is specifically designed to move away from the discounting that has hurt its luxury brand image. Furthermore, the company intends to reduce the markdown allowances to the channel, citing a highly promotional environment embraced by such stores.

Have more questions on Coach? See the links below:

• Coach: A Lone Ranger In The Retail Space
• Coach And Michael Kors Still In The Hunt For Kate Spade

See our complete analysis for Coach