Taking A Look At What Acquiring Kate Will Really Mean For Coach

UBS research analyst Michael Binetti reiterated his Buy rating on Coach Inc COH and raised his price target to $55 from $49 after completing his Coach and Kate Spade & Co KATE acquisition model.

Why Binetti Likes The Deal

Binetti believes Coach is the best acquirer for Kate Spade after going through a very similar, and even more extreme, turnaround with its brand. He also believes the deal price of $2.4 billion is very favorable, and conservatively, it should add about $50 million cost synergies; this should increase EPS accretion.

Further, he sees Kate Spade’s total corporate costs being covered by this cost synergy. A UBS contact also told Binetti that Coach should also be able to manufacture Kate Spade's current handbags for a larger gross margin. In his upside case, where Coach can reduce the corporate cut and increase margins, he sees $0.41 of total accretion (up from $0.32 in the base case).

Finally, Binetti sees two potentially large opportunities for Coach:

1. An opportunity to up their marketing campaign to accelerate brand awareness for Kate Spade. Kate Spade currently has just 30 percent in unaided brand awareness compared to 70 percent for Coach
2. Coach has a chance to expand the Kate Spade brand, especially internationally. Specifically, he sees China and Japan as being two large target markets.

Overall, Binetti noted, “We think Consensus estimates under-appreciate the upside from Coach’s core business from improving outlet trends, and full price stores consistently comping positive (with margins substantially below peak). KATE should quickly be accretive.”