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May 8, 2017

S3 Research: Kate Spade & Coach Shorts Need to Shop For New Sales

The Wall Street Journal reported in late December 2016 that Kate Spade & Co. (KATE US) was looking for merger partners after activist investor Caerus Investors sent a letter stating that KATE  should look to sell itself in order to unlock shareholder value. Today Coach Inc. (COH US) offered $2.4 billion, or $18.50/share, to acquire KATE. The price is a 9% premium over KATE’s previous closing price, but 23% less than its year-to-date high of $24.10 in late February.

KATE short interest averaged $211 million for the first 3 quarters of 2016 and then fell to $96 million duting 4th quarter 2016 as KATE’s stock price hit a low of $14.02 in late December and shorts covered their positions to lock in any short term profits they could recoup. KATE’s stock price spiked after the December WSJ article, and short sellers came back into the name. By the end of February KATE short interest hit its yearly high of $257 million. As KATE’s stock price climbed back in to the $20’s, short sellers again covered their positions and realized some of their losses. KATE short interest is $131 million today, up $48 million, or 59%, for the year but down $126 million, or 49%, from this year’s high.

KATE short sellers did not do very well in 2016 or 2017. They were down $27 million on an average short position of $187 million for a yearly return of -14.5%. Prior to today’s 8% price move short sellers were only down 3.5% in 2017. But including today’s price action, shorts are down $17.6 million on an average short position of $173 million for a return of -10.2%.

COH short sellers also had negative P/L in 2016 and 2017. They were down $45.8 million in 2016 on an average short position of $559 million for a return of -8.2% and are down $103 million, or 26.7%, on an average short position of $387 million in 2017. 2017’s P/L includes a mark to market loss of $29 million from today’s 5% price move.

There are still 7 million shares of KATE shorts on the street, and with COH’s $18.50 acquisition offer price and KATE trading at $18.40, I would assume most of these shorts will cover soon. If there is a surge of buying pressure in the near future, it may not be due to long shareholders hoping for a higher bid for KATE but from shorts buying to cover their positions.

Want deeper insight into the above analysis? Contact: 
Head of Research, S3 Partners
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