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Why Kate Spade & Company Plunged 25.1% in April

By Steve Symington – May 1, 2017 at 8:07PM

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The high-end handbag and accessories company fell as the market discounted the possibility of an acquisition.

What happened

Shares of Kate Spade & Company (KATE) fell 25.1% in the month of April, according to data provided by S&P Global Market Intelligence, after reports that the luxury lifestyle-products specialist wanted more time to consider a buyout offer, then announced disappointing first-quarter 2017 results.

So what

Kate Spade popped nearly 29% in February after the company revealed it was evaluating strategic alternatives. But after industry peer Coach Inc. reportedly presented an offer in late March, Kate Spade shares fell as much as 16% in a single day in early April after sources speaking to Reuters said it needed a few more weeks to negotiate a potential deal. 

Four Kate Spade handbags.

Kate Spade Handbags, IMAGE SOURCE: KATE SPADE & CO.

However, shares declined another 6.3% on April 18, 2017, when Kate Spade announced first-quarter 2017 results that missed expectations, stoking worries that its approach may have backfired. Quarterly revenue declined 1.1% year over year, to $271.2 million -- below estimates for $299 million -- including a 2.4% decline in same-store sales.

Net income also fell to $1.36 million, or $0.01 per share -- below estimates for $0.07 per share -- though that included $7 million in one-time pre-tax store impairment charges, and $2 million in fees and expenses related to its ongoing review.

Now what

Kate Spade investors shouldn't rule out a potential acquisition. The company didn't hold an earnings conference call and declined to provide forward guidance last month, noting management was continuing "to evaluate strategic alternatives to further maximize value for our shareholders." And to make matters even more interesting, Michael Kors has been reported as another interested suitor.

Given the combination of uncertainty surrounding the process, Kate Spade's underwhelming first-quarter results, and the company's meteoric rise leading up to the start of last month, it's hard to blame investors for taking some of their profits off the table in April.

Steve Symington 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. The Motley Fool has a disclosure policy.

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