The Bag With The Swag: Coach Initiated At Buy After 'Game-Changer' Kate Spade Acquisition

Coach Inc COH's "revival" over the past two years has been notable but may be overshadowed by its "game-changer" acquisition of Kate Spade & Co KATE, Canaccord Genuity's Camilo Lyon said in a research report in which he initiates coverage of Coach's stock with a Buy rating and $59 price target.

Coach's 'Revival'

The Game Changer

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Coach has succeeded in turning itself around over the past two years and has reasserted itself as "the NYC house of leather," Lyon stated. Leading the revival is the company's Creative Director Stuart Vevers who flawlessly executed a strategy of strong product innovation and solid brand positioning.

In fact, Coach's revival comes at a time when rival Michael Kors Holdings Ltd KORS is undergoing its own initiatives to boost its slumping brand, which implies incremental opportunities for Coach to gain market share.

Even without the Kate Spade acquisition, Coach can sustain a growth profile of positive low-single-digit comps, modest gross margin expansion and expense leverage — which will generate a low-single-digit earnings per share growth.

The Kate Spade acquisition is not only a "game changer" but "transformational in many ways," the analyst continued. Perhaps most importantly, Coach gains significant opportunities for cost synergies and gaining incremental market share by selling to consumers it does not actively reach, as there is just a 10-percent overlap between the two brands.

Coach can also leverage its already existing infrastructure to sell the Kate Spade brand in international markets as only 18 percent of Kate Spade's sales came from outside of the U.S.

Also, Coach's expertise in supply chain will also generate scale benefits for Kate Spade and the merging of both companies will remove duplicate corporate overhead costs.

As a whole, the Kate Spade acquisition could add 21 cents to Coach's fiscal 2018 EPS and 63 cents in accretion the following year. Over the longer term, Coach can achieve $50 million in synergies by 2020, which will be 15 percent accretive to its EPS.