The New York-based hedge fund Caerus Investors has written a letter to Kate Spade’s board urging it to sell the company.
“We have become increasingly frustrated by management’s inability to achieve profit margins comparable to industry peers,” Caerus’ founder, Ward Davis, and managing partner, Brian Agnew, wrote.
“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.”
Caerus doesn’t say how much of Kate Spade’s shares it owns, or what it intends to do if the company doesn’t take its advice.
Kate Spade beat third-quarter earnings estimates but missed on revenues. CEO Craig Leavitt cited “several macroeconomic factors, including a challenging retail environment and continuing tourist headwinds,” in a statement. He also cited lower tourist traffic after the firm’s second-quarter earnings miss.
The retail analyst Eric Beder of Wunderlich Securities said at the time that the firm was also suffering from bargain hunters and outlet-shoppers, who have “become even more aggressive in [their] demands for price cuts.”
Kate Spade’s stock was down 7.3% year-to-date as of Friday’s close.
Caerus says that more than $3 billion in equity value has been destroyed in the last two and a half years, that EBITDA margins are “woefully” below peers, and that current valuation reflects “little to no growth despite a 23% revenue and 36% EBITDA CAGR.”
The firm says Kate Spade would make a good acquisition candidate for a strategic lifestyle accessories company.
The brand equity, while strong, is “better suited in the hands of a larger, more experienced, global player,” the letter reads.
Here is the letter: