In this segment from Market Foolery, Chris Hill and Jason Moser discuss major consolidation in the fashion world as Coach (NYSE:COH) will be adding Kate Spade (NYSE:KATE) to its growing brand portfolio.
From the perspective of our analysts, these are two complementary businesses that will pair well together, though they're both on shakier footing than they were just a few years ago.
A full transcript follows the video.
This video was recorded on May 9, 2017.
Chris Hill: I actually want to start, before we get into the earnings, with, I would argue, the big business story from Monday, and that is Coach buying Kate Spade for $2.4 billion. I'm curious what you think of this deal. This is a week after Coach put up some pretty good numbers in terms of their latest earnings report. Shares of Kate Spade up on the buyout, and shares of Coach were up yesterday as well. I think it's because, among other things, enough investors looked at the deal that Coach was getting here and felt like they were getting value.
Jason Moser: Yeah, I think that's a good point there. I think, generally speaking, my wife and I were talking about this last night, I say this as the owner of a Coach briefcase that I'm very fond of, I think this is the marrying of two fantastically mediocre businesses. And I don't mean that necessarily to say that this is a bad deal. I think what we've seen here over the course of the last five years really, is generally, what happens in retail. Particularly, we've been talking about Coach, and how it's affordable luxury and what not. At what point do you go from being luxury to affordable luxury to just totally mainstream? There was a point where you could see the writing on the wall with all the discounts they were listing, and the outlet stores and everything, and it became very clear that they stepped away from that affordable luxury, and they were making the strategic move to become more of a lifestyle brand. And I think that's fine. There's nothing wrong with doing that, because they really do need to figure out a way to increase volume. They're not just handbags anymore, it's handbags, they're getting into clothes and shoes and all sorts of other things. So, while I don't think either business on its own is a tremendous opportunity for investors going forward, I do think this probably makes more sense, some consolidation in this sector bringing together a healthy portfolio of different offerings.
And that's ultimately what Coach is doing. They'll still talk to that lifestyle brand, and try to bring more things out there for everybody to peruse. It's not just a handbag company. But, again, this is, to your point about value, I think this values Kate Spade at something like 16.5 times trailing earnings, which is really not that bad at all. Coach is the bigger company. Kate Spade, I think, has plenty of opportunity of grow, particularly globally. So, I think Coach took an opportunity to get in there and make a reasonable offer for a company that I'm sure they'll be able to extract some value from.
Hill: I think you mentioned the mediocre businesses, and I'm not going to dispute that. I will say, however, I think the brands are stronger than the businesses. I think that might be the potential promise for investors -- these are too pretty strong brands. Going back to the value point, Kate Spade, three years ago, that stock was around $40 a share. Now it's in the teens. So, the brands, I don't look at them as being damaged or even mediocre, I look at them as solid brands. If they can get the operation part right, then I think it can work out for them. And you mentioned the discount, that was a big part of the story last week with Coach. They started ratcheting back the discounting, and lo and behold, their margins started to look better.
Moser: Yeah, go figure. At some point or another. We see it with restaurants, we see it with retail, eventually you hit a year where your comparables become too easy to clear, and the business starts to look better just because the past really looked so bad. Coach, for a long time, was a brand that I think possessed more pricing power than it does today. I don't know that it really does possess a whole lot of pricing power today. But, I do agree with you. I think the brands themselves are still very strong, and can transcend lines. It doesn't have to be just a handbag company, it doesn't have to be just a shoe company or whatever. I think they throw lifestyle strategy around, they want to become a lifestyle brand, and you think, "OK, what does that mean?" I mean, I get it, you're going to go out there and see everything from keychains to handbags to shoes to hats to whatever, and that's going to be the best way for these businesses to monetize and grow on a meaningful level. And I think, just as we see with certain restaurants when they hit the ceiling of their growth opportunity, and I think a good example here would be something like maybe Buffalo Wild Wings. The idea was they were going to start bringing more different types of restaurants under their umbrella. That was the PizzaRev, that was Rusty Taco. I think Coach is looking at this very much the same way.
I think we'll see Coach continue to look at some strategic acquisitions. It's nice to see that they didn't feel like they needed to overpay. I think the folks over at Kate Spade realized they were caught in a really difficult situation, and the writing was kind of on the wall. They saw what Coach went through, and they knew, "This is where we're going to be going if we don't figure this out." And that's the problem, it's not too easy to figure out. At some point or another, you have to figure out a way to get merchandise into the consumer's' hands. Usually, the best way to do that is make it a price you can't pass up.
Chris Hill has no position in any stocks mentioned. Jason Moser has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Buffalo Wild Wings and Coach. The Motley Fool has a disclosure policy.