Kate Spade Is For Sale; Wunderlich Says 'We Believe It Will Happen'

Wunderlich believes a sale of Kate Spade & Co KATE will happen as it makes an appetizing acquisition target for many players due to its compelling domestic and international growth opportunities, brand value and upper income focus.

Kate Spade, which makes luxury handbags, said it is undertaking a review of strategic alternatives (i.e., sale) after reporting fourth-quarter EPS of $0.41 ($0.07 above the Street), driven by better-than-expected international margins and strong overall operating leverage.

The announcement of strategic alternatives reflects pressure from U.S. hedge fund Caerus Investors, coupled with an industry wide sales slump, triggered by a drop in mall traffic and lower tourist spending due to a stronger dollar.

Analyst's Commentary

“We believe the company makes obvious sense for domestic handbag leaders Michael Kors Holdings Ltd KORS and Coach Inc COH. Further, we would not be surprised to see domestic-based apparel players ([i.e., NYSE:PVH)] look upon Kate Spade as a diversification play,” analyst Eric Beder wrote in a note.

Related Link: What's The Takeout Rate For Kate Spade?

Beder pointed out that Kate Spade’s revenue base is 30 percent of Coach, with limited international exposure. This makes the company a great fit even for international based luxury players who could bring their expertise to the table.

Beder maintains his Buy rating and raised his price target by $4 to $24.

“Our new price target of $24 translates to approximately 10.5x our FY17 EBITDA projection; we think that is a fair valuation for an acquisition by a synergistic player,” Beder added.

At last check, shares of Kate Spade were surging 14.44 percent at $22.51, resulting in an implied valuation of about $2.85 billion on a share count of 129.42 million.