Kate Spade Under Fire From Outside Investor Group
Caerus Investors, a New York City-based asset management firm focused on investing in consumer-related equities has sent a constructive letter to Nancy Karch, Chairman of the Board of Directors of Kate Spade (NYSE:KATE) urging the Board to take steps to realize shareholder value by pursuing a sale of the company. The full text of the letter follows:
Nancy Karch, Chairman of the Board
(Kate Spade & Co, 2 Park Ave, New York, NY 100016)
cc: Kate Spade Board of Directors
We are deeply concerned about the precipitous decline in the share price of Kate Spade over the last two and a half years brought about by management’s inability to meet their own stated goals. The stock has now fully retraced the entire gains from when the former Fifth and Pacific first announced its intention to isolate Kate Spade as a stand-alone entity in early 2013. While we have long admired the growth prospects for the Kate Spade brand, we have become increasingly frustrated by management’s inability to achieve profit margins comparable to industry peers. Given the market’s lack of faith in the current management team, as evidenced by the 63% decline in the shares since the intraday high on August 11th, 2014, we believe the best path for enhancing shareholder value is to pursue a sale of the company. We strongly believe that a strategic, industry player would be willing to pay a substantial premium to add this growth business to their portfolio.
Over $3bn in equity value destroyed in the last two and a half years
We first invested in Kate Spade back in 2009 under parent company Liz Claiborne solely on the basis that the stand alone value of Kate Spade was grossly mispriced inside an apparel conglomerate with other poor performing assets and high levels of debt. We argued back then for the break-up of the company and were gratified when the Board finally made the decision to act in 2013. Shareholders were rewarded as the stock surged above $40 over the following year. Since those successful moves, material shareholder value has been destroyed by wasting time, energy and money on the former sub brand Kate Spade Saturday and management has missed interim sales and margin targets on 3 different occasions.
We are writing to you and the Board to let you know that real change is needed at Kate Spade. The equity market is grossly under-valuing the future growth opportunity of the business and the Board must act in the best interest of shareholders to maximize value for the company.
EBITDA Margins are woefully below peers
EBITDA margins at Kate Spade are 400-1000bps below peers. Management has simply not delivered on stated margin targets resulting in the market doubting the prospects for the business.
Current Valuation Reflects little to no growth despite a 20% revenue and 42%
At one point during calendar year 2014, Kate shares traded at over 35x consensus EBITDA. Today, Kate Spade shares now trade at
Management and the Board have both stated on multiple occasions they see a path to $4bn in retail sales for Kate Spade, double the current run rate. Continue reading