Kate Spade & Company and Walton Brown, a subsidiary of Asian fashion retail and brand management group The Lane Crawford Joyce Group, have formed joint ventures focused on scaling and accelerating Kate Spade & Company’s growth in Greater China.
The partnership, formed in January, will leverage the expertise of Walton Brown, and the global demand for Kate Spade & Company products, to establish a strategic network of stores in key cities, enhanced by a robust organizational and marketing platform across China, Hong Kong, Macau and Taiwan.
“This partnership is a pivotal next step as Kate Spade & Company continues to advance along a key axis of our growth strategy – geographic expansion – while also continuing our partnered approach to margin expansion,” Craig A. Leavitt, Chief Executive Officer of Kate Spade & Company, said in a press release.
“Walton Brown is the right strategic partner as we position Kate Spade & Company for sustainable growth, allowing us to take a holistic approach to expansion, influence consumers and leverage resources across the Greater China region,” Leavitt said. “Walton Brown’s relationships, operations and marketing expertise will help us create a cohesive foundation of stores surrounded by a vibrant ecosystem to help deepen our connection with consumers in Asia.”
Kate Spade & Company also announced a share purchase agreement with E-Land Fashion China Holdings Limited, its current partner in China, to acquire E-Land’s 60% interest in Kate Spade China. The transaction is expected to close in February 2015.
The partnership will align Kate Spade & Company’s existing businesses in China and Hong Kong, Macau and Taiwan under one combined structure. Following the formation of the partnership, both Kate Spade Hong Kong, Limited, and Walton Brown will own 50% of the shares of Kate Spade China and KS HMT Co., Limited, the holding company for the Company’s wholly owned businesses in Hong Kong, Macau and Taiwan. With an equal partnership structure, Kate Spade & Company and Walton Brown will actively manage the business together. The partnership will have an initial term of 10 years.
The combined transactions are expected to include a $36 million payment to E-Land to acquire its interest in Kate Spade China and terminate related contracts and the receipt of approximately $21 million from Walton Brown for their interest in the joint ventures subject to adjustments.
In addition, Kate Spade & Company estimates that it will incur restructuring and transaction costs of approximately $5 million, including severance, lease terminations and asset impairments in order to convert the wholly owned businesses in Hong Kong, Macau and Taiwan into a joint venture. These transactions are consistent with the Company’s partnered and capital-efficient approach to geographic expansion and lay the foundation for a solid expansion strategy in the region with a long-term potential of 100 stores.
Kate Spade & Company will continue wholesale distribution to the joint venture in China and expects to begin wholesale distribution to Hong Kong, Macau, and Taiwan through the joint venture during the first quarter of 2015. Accordingly, the Company will no longer consolidate the operations for the businesses in Hong Kong, Macau and Taiwan, which had net sales of approximately $34 million in 2014 and will account for its investments in the partnership under the equity method of accounting.
Kate Spade & Company’s distribution agreements with Valiram in Singapore, Malaysia, Indonesia and Australia and AT Luxury in Thailand are not affected by these transactions.