Keep The Faith: Analyst Still Believes Kate Spade Sale Will Occur

April 19, 2017 10:51 am
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Kate Spade & Co (NYSE:KATE) saw its stock get hit Tuesday after the company disappointed investors with poor sales data for the first quarter. The fashion brand also reaffirmed its commitment to continue evaluating a sale of itself but the language used in a press release gave the impression that any deal won't be forthcoming.

Kate Spade said the process to explore strategic alternatives is underway but "nothing has been determined yet." Nevertheless, some among Wall Street remain convinced that a sale will occur at a premium to the current stock's price.

Eric Beder of Wunderlich maintained a Buy rating and $24 price target on Kate Spade's stock, despite the company's earnings report came in "well below" market expectations. Specifically, revenue for the quarter fell 1.2 percent on a year-over-years basis which marks the first revenue contraction since 2012. In addition, overall comparable store sales fell 2.4 percent but an 8.1 percent same-store sale decline in the brand's physical store network was also seen.

Value To A Buyer

Beder noted Kate Spade continues to suffer from headwinds within the highly competitive and promotional handbag market. Nevertheless, the analyst believes "a sale of the company to a strategic buyer is likely to occur" as Kate Spade's brand offers "considerable value" to a strategic buyer.

Beder justified his views by noting Kate Spade's strong organic sales growth profile, a strong white space opportunity especially in the international market, and strong consumer engagement and loyalty.

On the other hand, Kate Spade can no longer be considered the "crown jewel of performance" in the handbag market given its poor results on Tuesday. A sale of itself to a market leader could improve the brand's operational cost efficiency profile and offer operational support to boost the brand.

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