Your Roadmap To Navigating The Coach-Kate Spade Acquisition

Coach Inc COH's $2.4 billion acquisition of rival handbag and apparel maker Kate Spade KATE is finalized, but begs the question: what impact will this have on Coach's stock?

What You Need To Know

One of the most important factors to consider is Kate Spade's very low store count in North America of 108 full-price units and 68 outlet stores versus Coach's 223 full-price units and 172 outlets, UBS' Michael Binetti noted in a research report. As such, Coach has some opportunity to add Kate Spade stores, especially in areas where Coach has already closed some of its full-price stores.

Meanwhile, 61 percent of women who haven't purchased a Kate Spade item still hold a favorable view of the brand which is greater than 56 percent for Coach, the analyst added. Kate Spade is also more favorably viewed among various demographic groups, including millennials and wealthy consumers which bodes well for Coach's plan to reduce brand-dilutive Kate Spade sales to "shore up pricing power."

The Math Behind The Deal

Based on the analyst's calculations, the acquisition of Kate Spade could be at least 32 cents per share accretive to Coach's fiscal 2020 earnings based on a conservative assumption of $50 million in cost synergies.

Coach can even manufacturer Kate Spade's handbags which can generate a three to four basis point improvement versus Kate Spade's current operations which can add another 9-12 cents per share to Binetti's calculations.

As such, the analyst's $55 price target on Coach's stock is based on an 18x multiple on his fiscal 2019 earnings per share estimate of $2.77 plus 32 cents per share in accretion. Perhaps more important, since the acquisition was announced, the Street didn't move their consensus estimates on Coach higher at all which implies the merger will generate further upside versus current expectations.