Shares of Kate Spade (KATE US) jumped as much as 6.9% yesterday, after rumors continue to emerge that the luxury handbag and apparel designer will eventually be acquired by either a competitor or private equity firm with bids expected as early as this month. In fact, shares have risen 35% since 12/27, when reports first came out that the company was exploring a possible sale.
In light of this recent run-up in price amid the takeover speculation, short interest has been soaring in tandem. Since hitting a 2016 low of 3.6 million shares and $53.5 million in short exposure (real dollars at risk) on 11/30, short interest has been steadily climbing. Our proprietary models are now projecting real-time short interest to be as high as $279.7 million in short exposure, or as much as 14.2 million shares currently out on loan. This equates to a 423% increase in money at risk on the short side and 294% increase in the amount of shares on loan to shorts since that low. The last time short interest was this elevated on KATE was March 2016, when the stock price was trading around its 52-week high in the $24-25 range.
Interestingly, when BofAML cut its stock rating on KATE to Neutral on 1/19, citing that buyout potential was already priced in, the stock was trading at $17.83/share. We estimated short interest to be 9.1 million shares and $162.3 million of short exposure at the time. Now that shares are up over 10% since that downgrade, shorts have continued to pile in, recognizing that there is a premium priced in to the stock amid the swirling rumors.
With the company’s next earnings announcement right around the corner on 2/23, there will be heightened interest to see how the company performed over the all-important holiday season, especially if this is the last quarterly report as a stand-alone business.
For more information on the above analysis, please contact:
Matthew Unterman, Director, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.