Shares of handbag maker Kate Spade & Co. (NYSE:KATE) popped today on reports that the company was seeking a buyer, closing up 23% on the news.
The stock began surging this afternoon, when The Wall Street Journal reported that the company was exploring a sale. Activist hedge fund Caerus Investors had been pushing for a sale, noting the stock's decline since a 2014 peak, as it's lost half of its value since then. The Journal said buyout efforts were at an early stage, as it's working with an investment bank to reach out to potential buyers.
Kate Spade and rivals Coach (NYSE:TPR) and Michael Kors (NYSE:CPRI) have struggled in recent years amid a glut of stores and a loss in pricing power. The handbag brands have also been battling with department-store chains over discounting during the holiday season, as the companies are looking to regain their luxury status.
It's not surprising to see the stock pop after such news, as it would probably command a sizable premium in a sale. Kate Spade is still growing, with sales up 14% in its most recent quarter and profits continuing to increase as well. Rumored buyers include Coach, which has a considerable global footprint and strong relationships with department stores.
Looking at the news from a different perspective, a sale seems to signal that management believes it's unable to return the stock to its 2014 heights, as retail traffic has slowed and the sector has faced other challenges, including a stronger dollar, which pressures international sales. Caerus announced its stake in November, pushing for a sale because it believed the company had been mismanaged. With the search still in its early stages, any outcome is possible, but today's pop would make a deal more expensive, possibly pushing away a potential buyer.
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Coach. The Motley Fool owns shares of Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.