November 14, 2016

Nancy Karch
Chairman of the Board
Kate Spade & Co
2 Park Ave
New York, NY 100016
cc: Kate Spade Board of Directors
Dear Nancy,
We are deeply concerned about the precipitous decline in the share price of Kate Spade over the
last two and a half years brought about by managements inability to meet their own stated goals.
The stock has now fully retraced the entire gains from when the former Fifth and Pacific first
announced its intention to isolate Kate Spade as a stand-alone entity in early 2013. While we
have long admired the growth prospects for the Kate Spade brand, we have become increasingly
frustrated by managements inability to achieve profit margins comparable to industry peers.
Given the markets 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. We strongly believe that a
strategic, industry player would be willing to pay a substantial premium to add this growth
business to their portfolio.

Over $3bn in equity value destroyed in the last two and a half years


We first invested in Kate Spade back in 2009 under parent company Liz Claiborne solely on the
basis that the stand alone value of Kate Spade was grossly mispriced inside an apparel
conglomerate with other poor performing assets and high levels of debt. We argued back then for
the break-up of the company and were gratified when the Board finally made the decision to act
in 2013. Shareholders were rewarded as the stock surged above $40 over the following year.
Since those successful moves, material shareholder value has been destroyed by wasting time,
energy and money on the former sub brand Kate Spade Saturday and management has missed
interim sales and margin targets on 3 different occasions.
We are writing to you and the Board to let you know that real change is needed at Kate Spade.
The equity market is grossly under-valuing the future growth opportunity of the business and the
Board must act in the best interest of shareholders to maximize value for the company.

EBITDA Margins are woefully below peers

EBITDA margins at Kate Spade are 400-1000bps below peers. Management has simply not
delivered on stated margin targets resulting in the market doubting the prospects for the business.

Revenues
change yoy
EBITDA
change yoy
EBITDA Margins
change in bps

Kate Spade
CY
CY
CY
CY
2013
2014
2015
2016
803.4 1,138.6 1,242.7 1,387.6
42%
9%
12%
88.0 147.0 202.9 254.2
67%
38%
25%
11.0%
12.9%
16.3%
18.3%
195 342 199

Coach
FY
FY
FY
FY
2013
2014
2015
2016
5,075.4 4,806.1 4,191.6 4,491.8
-5%
-13%
7%
1,740.7 1,445.8 980.3 987.2
-17%
-32%
1%
34.3%
30.1%
23.4%
22.0%
(421) (670) (141)

Michael Kors
FY
FY
FY
FY
2013
2014
2015
2016
2,181.7 3,310.8 4,371.5 4,712.1
52%
32%
8%
685.1 1,087.2 1,395.6 1,355.9
59%
28%
-3%
31.4%
32.8%
31.9%
28.8%
144 (91) (315)

Note: Company filings and Bloomberg Consensus estimates. Kate Spade 2016 estimates are Caerus estimates.

Current Valuation Reflects little to no growth despite a 23% revenue and 36% EBITDA
CAGR
At one point during calendar year 2014, Kate shares traded at over 35x consensus EBITDA.
Today, Kate Spade shares now trade at <8x consensus 2017 EBITDA, a multiple below where
the predecessor company Fifth and Pacific sold both Lucky Jeans and Juicy Couture, brands with
far inferior growth prospects than Kate Spade.
Management and the Board have both stated on multiple occasions they see a path to $4bn in
retail sales for Kate Spade, double the current run rate.

Note: CY2013-2015 are non GAAP actuals. 2016 estimates are Caerus estimates.

Revenues at Kate Spade this year are estimated to grow 11% versus the two closest peers where
revenues are growing 2%. EBITDA is expected to grow 21% versus peers where EBITDA is
expected to contract at Michael Kors and grow 16% at Coach. Sadly, with a growth rate in
revenues and EBITDA equal to or significantly higher than peers, Kate trades at a discount to the
peer set on EV/Sales and at a discount to Coach on EBITDA.

Last
Price

Sales
LY

EST

EST

Sales
CY

Sales
NY

IBES
EST
EV/
Sales

LY
EBITDA

CURR YR
EBITDA

IBES
EST
NXT YR
EBITDA

EV/
EST
CURR YR
EBITDA

EV/
EST
NXT YR
EBITDA

Kate Spade & Co

change yoy

16.61

1,242.7

1,384.4
11.4%

1,519.4
9.8%

1.6

202.9

245.2
20.9%

289.0

9.1

7.7

Coach Inc
change yoy

36.71

4,491.8

4,580.8
2.0%

4,802.0
4.8%

2.1

937.0

1,083.7
15.7%

1,156.6

9.0

8.5

Michael Kors Holdings Ltd

change yoy

51.95

4,538.8

4,644.1
2.3%

4,733.6
1.9%

1.8

1,305.4

1,203.7
-7.8%

1,152.0

7.0

7.3

Note: Company filings and Bloomberg consensus estimates.

Paths to Value Creation

As you might imagine, shareholders (ourselves included) are incredibly frustrated. Kate Spade
still has a large market opportunity yet the equity valuation reflects a low/no growth valuation.
The only logical conclusion to make as a result of the dramatic share price decline is that
shareholders have lost confidence in management and their ability to increase EBITDA margins
toward the peer set.
We think Kate Spade would make a great acquisition candidate for a strategic company in the
lifestyle accessories category. The Companys margins are well below peers with material
opportunity for expansion as licensing revenues grow and the business scales over time. Kate is
still under penetrated overseas with a nice runway for growth. A potential buyer would be able to
realize material cost and revenue synergies over time allowing for the ultimate expansion of


EBITDA margins toward the peer set. Simply using a reasonable precedent growth company
multiple of at least 12x EBITDA would warrant a share price in excess of a 50% premium to the
current price. In fact, in March of this year Samsonite acquired Tumi for over 15x EBITDA and
3x revenues. We strongly suggest the Board consider this option as public equity investors have
all but given up on the Kate Spade story.
We think the brand equity is extremely strong but better suited in the hands of a larger, more
experienced, global player that can more effectively grow the business.

Best Regards,

Ward Davis

Brian Agnew