Kate Spade Jumps After Confirming M&A Process, Pre-Reporting Upbeat Q4

Shares of Kate Spade (KATE) jumped after the handbag and apparel company pre-reported quarterly results and announced a strategic process, confirming media reports in recent months of a potential sale. Several Wall Street analysts appeared to welcome both the fourth quarter report and M&A confirmation, with research firm William Blair modelling a possible takeout bid as high as $29 per share.

KATE Q4 RESULTS: Kate Spade, which had scheduled its quarterly report for February 23, released its Q4 results Thursday morning, showing profit of 41c on revenue of $471M versus estimates of 35c and $473M. Direct-to-consumer comparable sales grew 9.3%, or declined 1.5% excluding e-commerce. Weighing in on the numbers, CEO Craig Leavitt said, "Our solid Q4 and fiscal year performance demonstrate the strength of our differentiated business model, as we continued to gain market share and deliver strong growth despite a challenging retail environment."

STRATEGIC REVIEW: Perhaps the more likely driver of its stock's double-digit move today, Kate Spade also announced it is "conducting a process to explore and evaluate strategic alternatives." The company has retained investment bank Perella Weinberg, and said it "plans to proceed in a timely manner, but has not set a definitive timetable."

CITI SAYS Q4 BETTER THAN EXPECTED: Weighing in on this morning's announcement, Citi analyst Kate McShane called the financial results "better than expected" and said she expected the stock to trade higher given that management has now confirmed recent reports of a possible sale, though McShane also concedes that the implied declines in brick-and-mortar stores "are concerning." The analyst kept a Buy rating and $18 price target on the stock.

WILLIAM BLAIR MULLS $21-$29 DEAL PRICE: William Blair's Dylan Carden similarly called the quarter "stronger than expected" while noting that the company declined to give forward guidance or host a Q&A session in light of the strategic process. The "better" quarterly performance "provides potential upside to an expected takeout price, and comfort around concerns of top-line deceleration," Carden says. Notably, the analyst believes 10-14 times trailing EBITDA is a "reasonable assumption" for a takeout price, suggesting a sale of the company could come at $21-$29 per share. Keeping an Outperform rating on the stock, the analyst raised his 2017 EPS estimate for Kate to 90c from 82c and says he expects same-store sales growth "at the higher end of a midsingle-digit range."

MEDIA REPORTS OF SALE: The Wall Street Journal reported on December 28 that Kate Spade was exploring a sale and had reached out to potential buyers, including other retailers, according to sources. The publication noted that Coach (COH) "has long been considered a good home for Kate Spade," and Bloomberg later reported that the company had drawn interest from six possible suitors. Building on those reports, Cowen analyst Oliver Chen in January added Michael Kors (KORS) to the list of hypothetical buyers, while Wells Fargo named PVH Corp (PVH) as a potential dark horse.

PRICE ACTION: Shares of Kate Spade are up 14.5% to $22.54 in afternoon trading. Coach and Michael Kors, meanwhile, have dipped 1% and 0.2%, respectively.