Wells Fargo Sees Things Getting Interesting for Kate Spade (KATE); Affirms at 'Outperform'
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Wells Fargo affirms Kate Spade (NYSE: KATE) at Outperform with a valuation range of $21 - $22 after Caerus Investors sent a constructive letter to Nancy Karch, Chairman of the Board of Directors of Kate Spade urging the Board to take steps to realize shareholder value by pursuing a sale of the company.
The firm commented today,
So far, management at KATE has not responded to the letter. Coincidentally this AM, an activist firm initiated a 1.1M position in the name, as announced today via the 13F filing (position as of 9/30). This all comes at an interesting time as brand houses like VFC, PVH, HBI, KORS, and COH have all said they are looking to make a branded acquisition, and KATE could be one of the strongest candidates. While other branded companies are seeing negative comps, pulling back on wholesale exposure, reaching maturity in certain markets, or restructuring, KATE continues to grow.
Big picture, KATE has seen some recent choppiness in fundamentals over the past few quarters; however, 1) the brand is healthy (they continue to gain share), 2) bottom-line growth continues to outperform (35% growth YTD with another 15-20% growth in 2017 appearing reasonable), 3) there continues to be a meaningful opportunity to expand wholesale distribution (underpenetrated in key doors like M, shelf space opportunity within their largest customer JWN), 4) margins should continue to move higher (12.5% EBIT margins remains 6-8 points below accessory peers) and 5) we believe valuation is extremely compelling here (just 6.7x EV/EBITDA on 2018E numbers - ex-share based comp but including benefit of NPV of $739 million NOL balance).
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