Coach (COH) announced on Tuesday that it was buying the fast-growing Stuart Weitzman luxury shoe brand for $574 million, a move designed to give the handbag maker a bigger toehold in upscale footwear, more fashion credibility and more of a presence in Europe.
The deal comes at a time Coach is trying to arrest a dramatic sales decline in North America, and restore an aura of luxury to a brand that has been diluted by years of discounting, an expansion of its outlet stores change, and too big a focus on logos.
Yet the struggling leather-goods maker’s shares, which have fallen by more than half since all-time highs nearly three years ago, dropped 1.2% on the news.
It’s not that Wall Street doesn’t think the deal is good. In fact, many analysts praised Coach for a deal that will give it more access to luxury retailers like Nordstrom (JWN), Neiman Marcus and Saks, and give its results an immediate boost once the deal closes, expected in May.
The acquisition shows “can take some offensive, growth oriented steps while continuing to reposition the core Coach brand,” said KeyBanc Capital Markets analyst Ed Yruma in a note.
But there was also concern about any potential impact on Coach’s turnaround. (In June, Coach announced it would close 20% of its North American stores to focus on 12 major markets and reduce the number of prestige- and profit-sapping profit discounts. It is also upgrading its stores, focusing on flagships.)
“Investors are currently focused on a Coach core business turnaround and capital returns so any distraction factors will be seen as adding complication and risk during a critical turnaround phase,” Stifel Nicolaus said in a note, to explain the share drop.
Here in greater details are some of those concerns:
1. The deal doesn’t do much for what Coach most urgently needs to fix: its handbag business.
The biggest reason behind Coach’s stock slide in the last three years has been a big loss of market share in the handbag wars to newer rivals Michael Kors (KORS) and Kate Spade (KATE), among others. And women’s handbags and leather accessories generated 77% of its $4.8 billion in revenue last year. In North America, by far Coach’s largest market, comparable sales fell 24% last quarter, meaning that fixing that handbags business, more than building its footwear business, should be its top priority, analysts said.
Coach needs to “focus on recapturing the considerable market share” it lost to those rivals, especially at the $300 price level, Topeka Capital Markets analyst Dorothy Lakner said in a research notes to clients.
2. It’s potentially a distraction for Coach management during its turnaround.
The Weitzman deal is the first acquisition ever by Coach, which was spun off in 2000 by Sara Lee, as a public company. Even though the brands will be kept separate (i.e. you won’t be able to buy Stuart Weitzman shoes at Coach), and Weitzman himself and his management team will stay on, the fact remains Coach will have to put some resources into integrating the company. Stifel Nicolaus said any distraction could complicate its turnaround.
3. It doesn’t move the needle much as sales continue to slip sharply.
Stuart Weitzman is no doubt a growing brand—its revenues have grown to about $300 million a year, compared to $200 million five years ago. But that’s only 6% of company revenues, and even if it grows 10%, or $30 million a year, that won’t do much to slow down Coach’s revenue decline until, and if, its turnaround takes hold.
(Last year, Coach’s global revenue fell $275 million and it expects North American comparable sales to keep falling this fiscal year. Also, footwear currently generates less than a tenth of Coach’s overall revenue.)
What’s more, despite its luxury aura, Weitzman may not be immune to lures and dangers of the discount channel—a year ago, in earnings reports, a previous owner, Jones Group, said its profit had been hurt by a jump in sales of Weitzman shoes to off-price retailers.
4. Is this a sign its new merchandise is not catching on?
Coach has bet heavily it can regain its fashion credibility on a new line of merchandise by its well regarded creative director Stuart Vevers, who joined Coach in September 2013, replacing Reed Krakoff. His first collection for Coach, which hit stores in September, and included a lot of footwear and clothing, got rave reviews in the fashion press. But the Weitzman announcement, coming so soon after September, sparked some on Wall Street to wonder whether Vevers’ line had fallen flat. (We’ll know more about that later this month when Coach reports its second-quarter earnings.)
Still, overall, the deal did get kudos for giving Coach instant credibility in the footwear business, where it expects its sales to rise 7% a year in the next 5 years, along with access to deep expertise in shoes. Topeka’s Lakner even said the Weitzman shoes were a better match for the pricier handbags Vevers has introduced.