Perhaps the buzziest fashion M&A deal of the year, thus far, has made its debut: Coach Inc. is the new proud parent of Kate Spade & Co.
Between Coach’s ambitious plans to create the “first New York-based house of modern luxury” and its strategy to taper down on “brand-damaging” promotions for Kate Spade, the merging of the two fashion mega firms is the kind of deal headline dreams are made of.
But, beyond the initial reactions surrounding the deal’s impact on both brands — as well as Stuart Weitzman, which Coach acquired in 2015 — the most telling aspect of the deal might be what it signals about where the fashion industry is headed.
The rise of e-commerce pure-plays and alarming consumer shifts online have contributed to a recent wave of Chapter 11 filings by brands and retailers that are cracking under the weight of mounting debts and a rapidly-evolving retail landscape.
And, two fashion companies pooling their resources to shoulder the challenges may just be another sign of the times — and more importantly, a crucial indicator of what’s to come.
“My sense is that we are going to see a lot more [retail consolidation] over the next few years, ranging from deals like Coach/Kate to brand intellectual property being acquired out of bankruptcy that will go forward in a substantially modified form,” explained Jeff Van Sinderen, an analyst with B. Riley & Co. LLC. “Within the context of the ongoing massive structural change that is impacting retail, there will be more brands that cannot make it on their own and/or are simply better off leveraging the infrastructure of a larger player.”
Indeed, the past six months have seen an uptick in M&A activity in the fashion space, and experts have readily casted the situation as evidence of companies searching for a lifeline during turbulent times.
Since December, several smaller footwear brands have switched hands: Caleres closed out 2016 with a buyout of men’s brand Allen Edmonds; Marc Fisher Footwear purchased Easy Spirit in January; and Steve Madden snapped up family-owned Schwartz & Benjamin a few weeks later.
“This is a bifurcated market, in that the strong will survive and reap the benefits of either acquiring strong brands at attractive multiples, or they’ll survive and benefit from competitors going away altogether,” Canaccord Genuity Inc. analyst Camilo Lyon told FN in March.
When chatter surfaced in December 2016 suggesting that Kate Spade would be up for sale, analysts were mixed regarding what company could make a fitting suitor. Kate Spade confirmed that it was exploring strategic alternatives in February and Michael Kors, Coach and a few private equity firms were among those to reportedly show interest.
With many private equity firms snapping up fashion companies in recent years, market watchers have been at odds about how such companies help or hurt labels.
“A lot of these private-equity firms, for example, come in and they have dreams of grandeur but realize that they can’t execute them,” Susquehanna Financial Group LLLP analyst Sam Poser said in an interview with FN in March. “And we’ve seen the results. We’ve actually seen companies go away — as in the case of Eastern Mountain Sports, Bob’s Stores, Wet Seal and Sports Authority — because of private-equity ownership.” (EMS, Bob’s, Wet Seal and Sports Authority have all filed for bankruptcy.)
In the case of Kate Spade, Van Sinderen said he expected to see the company land in the hands of a strategic buyer — that could leverage its expertise — from the very beginning.
In a presentation to investors on Monday, Coach’s management already noted several key synergies that the company hopes to tap now that it has three major high-end brands in its wheelhouse.
“We believe Coach’s extensive experience in opening and operating specialty retail stores globally, and brand building in international markets, can unlock Kate Spade’s largely untapped global growth potential,” Coach CEO Victor Luis said. “We are confident that this combination will strengthen our overall platform and provide an additional vehicle for driving long-term, sustainable growth.”
And, this may just be the beginning: “I would sum it up by saying that the industry is in the middle of a period of consolidation on many levels and there is a lot more on the horizon that is left to unfold,” Van Sinderen said.