Coach + Stuart Weitzman

Fashion, News and commentaries

A little more than 10 years ago, I walked in to a Stuart Weitzman store in Aventura Mall in Miami, FL and then walked out in irritation. I was in the market for my occasional splurge-worthy, fancy pair of shoes and it seemed like a fancy store. It had fancy prices but the shoe designs themselves looked so boring and unimaginative – certainly not for my twenty-something self back then.

Fast forward to today and with the founder/CEO/Creative Director Stuart Weitzman’s “showboating tricks” such as the ““Million-dollar Shoe”, the Stuart Weitzman brand is cool again with a reported $300M one-year revenues ended in Sept. 30. The footwear hits include the 5050 and Highland boots, the Nudist and Gladiator sandals. Last month, it was reported that Stuart Weitzman was up for grabs by private equity firm Sycamore Partners. On Monday this week, Coach filed a Form 8-K announcing the purchase of Stuart Weitzman for $530M in cash and potential earnouts of $14.66M annually in cash over the next 3 years if revenue targets are met. The $574M-deal is set to be finalized in May 2015.

Stuart Weitzman hits

The state of Coach
Since its founding in 1941, Coach has focused exclusively on its own label and has found success doing so – from $953M in sales a decade ago to almost $5B last year. But 2014 has been an especially tough year for Coach. Since its high in 2012 trading at $77, the company’s market value has plunged to $10B today. Put simply, Coach bet too much on promotional events and its outlet stores to ramp us sales. In the process, the brand lost its allure as “aspirational” and yielded market share to Michael Kors and Kate Spade. The drop in revenue figures in 2014 was in part due to a transformation strategy that resulted in the closure of underperforming stores and drop in promotional events.

In 2013, the company hired Mulberry and Loewe alum, Stuart Vevers as the new creative director. The company also staged its first New York fashion week show in February 2014. Vever’s collection hit stores in September 2014 and was received favorably by the fashion press. In October, Coach posted its 6th straight quarter North American sales declines. The impact of Vevers may yet to be reported in the company’s upcoming earnings report on January 28 2015.

Why did Coach buy Stuart Weitzman?
Coach is doing a two-pronged approach to its turnaround: to be a lifestyle brand and to be an “aspirational” brand once again. In order to be a lifestyle brand, the company must rely on products beyond its handbag business which, last year accounted for 77% of its $4.8B revenues. Footwear is a growing market and Coach entered the shoe business in 2013. So far, it only accounts for less than a tenth of Coach’s overall revenue. With the Stuart Weitzman buy, Coach can capture a piece of the mid-luxury shoes pie. After all, most often than not, women buy more shoes than handbags especially in mid- to high- luxury segments. Furthermore, the company can leverage Stuart Weitzman’s know-how in managing the footwear supply chain, something that is markedly different from handbags. Unlike handbags, footwear comes in different sizes for every style which can be an inventory challenge. Stuart Weitzman is vertically integrated, owning the factories that produce its footwear.

Part of Coach’s moves in the past year has been to mark up their handbag prices from the usual range of $200-$400 in order to up the brand’s exclusivity. In its October earnings report, the company reported that North American sales for handbags costing more than $400 accounted for 30% of handbag sales. It seems that as a handbag maker, the brand still has some cachet. The same could not be said of its relatively new shoe line. Marking up $150 shoes to $400 requires a lot more traction. Stuart Weitzman’s mid-luxury footwear can help solve this problem.

What are the concerns with the deal?
One of the biggest concerns about the deal is that Coach is in the midst of a large scale turnaround plan. Other than what I mentioned above, the company is also redesigning its stores in line with offering more than handbags. With the purchase, Coach might lose focus and redirect resources that are supposed to rebuild the brand into integrating Stuart Weitzman into the company.

Another way to look at this is: even with Stuart Weitzman’s $300M revenues and projected 10% growth, it is still not a big enough impact on Coach’s bottom line. Coach has to make its handbags cool again and grow Stuart Weitzman’s operations just to move the earnings needle a little more. That is quite a lot to tackle.

My take in a few words
I personally applaud Coach for buying Stuart Weitzman. They need to be able to compete in the growing mid-luxury footwear market and they have done a seemingly halfhearted and late attempt so far. Stuart Weitzman is already there with a ready list of hits and a following under its belt. I also like the fact that Stuart Weitzman owns the factories that produce its footwear – those assets and the know-how that comes with managing those operations are definitely worth $574M.

Advertisements

Snapchat’s $10B valuation and the weekly roundup in tech and retail

News and commentaries

I did not balk at Instagram’s $1B acquisition by Facebook nor at Dropbox’ estimated $10B valuation. I believe that both address certain needs. Instagram was widely used in fashion, an industry that most people continue to underestimate. Dropbox, based on experience, is the easiest way to manage files in the cloud and addresses students, teachers, professionals, as well as enterprises. But it seems that recent billion-dollar valuations in the tech space have been based not so much on their business models but rather on how much of an acquisition target they can be.

Looking at Snapchat‘s recent valuation of $10B, I do balk a little. Admittedly, I have not taken advantage of the app’s ephemeral messaging features, which I imagine, are used for drunken messaging and sexting. I don’t necessarily think these features are solving a need so great that people will eventually pay for it. Furthermore, the app’s demographic of teenagers are quite a fickle bunch. However, as an acquisition target, the $10B valuation makes some kind of crazy sense. Kleiner Perkins Caufield & Bryers, the venture capital firm leading Snapchat’s round, must have some really good inside information of how they can profitably exit this one. Google, Apple, Facebook and even Amazon have to fight to stay relevant especially among the elusive millennials. If these companies want to have a pipeline of young users to whom they can eventually sell anything to, then Snapchat and others like it are an expensive but necessary buys.

Read on for this week’s most relevant news in tech and retail:

In tech:

  1.  After failed talks with Google, Amazon acquires game streaming site, Twitch for $1B
  2. Apple sends invites for September 9 keynote event, may launch iPhone 6 and iWatch
  3. Dropbox announces lower pricing, new features and offers 1TB cloud storage for $9.99/month
  4. Instagram releases new app, Hyperlapse, turning shaky videos into time-lapses
  5. Fashion wearables: Ralph Lauren with OMsignal launch high-tech biometric shirts at the US Open; Rebecca Minkoff will debut 2 bracelets for charging and notifications at next week’s runway show

In retail:

  1. Quarterly reports: Salvatore Ferragamo second quarter reports show higher than expected profit of €90M, up 8% from last year; Tiffany & Co. second quarter earnings are up 7% compared to last year, raises full-year forecast
  2. Alibaba reports April-June results of 46% increase in year-on-year revenue of $2.54B, fuels the fire of impending IPO; IPO roadshow rumored to start after Labor day
  3. Dalian Wanda Group enters into a ¥5B e-commerce joint venture with Tencent and Baidu
  4. Abercrombie & Fitch  to remove logos after disappointing second quarter revenues of $891M, a 6% drop from last year
  5. E-commerce startup JustFab raises $85M at a valuation of $1B

What the billion-dollar Twitch acquisition means for Amazon’s long-term view

News and commentaries, Technology

Amazon has been unprofitable for years. In a 1997 interview with Inc., Jeff Bezos said:

“We’re going to be unprofitable for a long time. And that’s our strategy.”

Image from International Business Times

Bezo’s long-term view does not equal profits
Kudos on Bezos for such a long term view: always make customers happy, earn their trust, get their business, and offer them even more business beyond what you were originally offering. Investors are more than happy to buy Amazon stock at P/E multiples of hundred times earnings, betting that Amazon’s constant reinvestment and foregoing of profits will allow the company to capture the biggest slice of the retail pie, with e-commerce only set to increase over the years. In 2013, US retail sales reached $4.5 Trillion with e-commerce accounting for 8% of that number. In 2nd quarter of 2014, e-commerce sales accounted for 6.4% of total retail sales.

This strategy comes with a huge price of multi-million dollar acquisitions and infrastructure investments to constantly be ahead of logistics technologies. In the spirit of building new business lines to always keep customers within the Amazon umbrella, the company entered hardware with the Kindle readers and most recently the Kindle Fire Phone, offering these devices at cost and making money with e-book purchases.

Is Amazon Prime past its prime?
As a fervent Amazon Prime member, I can attest to being a very satisfied customer and perfectly willing to pay the recent Prime price hike. Two-day shipping that spans beyond Amazon.com (Prime shipping includes Shopbop.com), excellent customer service, easy payments (Amazon payments can also be used at Diapers.com) and for a long time, tax free purchases. Being a Prime member also meant that I get free access to a selection of Prime videos and e-books.

I have certainly been a great believer in Amazon’s long-term and dominant strategy but I have been having doubts lately. The shopping differentiations that I mentioned as a customer are being whittled down by increased competition from other retailers, new services (eg. Shoprunner which offers 2-day shipping in partnership with hundreds of online stores ) and a lobby to abolish the Internet sales tax loophole. Since May 2014, Amazon started charging sales tax in Florida for example.

To add to all these, Amazon seems to be on a roll of fighting with its suppliers – its fight against book publisher Hachette has yet to be resolved, canceling pre-orders of books from Hachette. Already, the company is in the middle of a dispute with another supplier, Disney; again restricting DVD pre-orders from the supplier.

Amazon’s investments in hardware and digital media content add more costs
Beyond these examples focused on Amazon’s e-commerce portal, I question Amazon’s investments in hardware and content offerings. I am not a believer of the Kindle Fire Phone. It is a cool gadget, yes, but imagine the resources that Bezos spent on developing a device that many consider to be a flop – resources that he could have used elsewhere.

Then, there’s Amazon original programming. The company’s last quarter report ending June 30, 2014 showed worldwide revenues of $19.34B. To get this seemingly impressive revenue, Amazon had to spend $19.3B (Cost of sales at $13.4B and SG&A expenses at $5.93B). The quarterly report was vague on how much the company spent on original programming but they do attribute the increased cost of sales to digital media content.* And the company is far from finished.

This week on August 25, 2014, Amazon bought game-streaming site Twitch after Google/YouTube failed to close the deal. At $970M in cash, the acquisition must surely be hurting Amazon’s cash flow. At least with Twitch, users are the ones who upload the content and with 45 million viewers watching 13B minutes of gaming a month, Amazon reaches a broad, new audience to peddle gaming hardware and software.

Is Amazon losing its focus?
Despite the massive size of Google, its acquisitions and its projects have almost always been aligned with its business model: ads. Build Gmail, Chrome and Maps, offer it for free, serve ads, accumulate data to make those ads even more relevant. Build a driverless car so people can spend more time online; expose them to ads. Buy a satellite company for an even better Maps experience and improve Internet access. Some moves are longer term view than others but they somehow still make sense.

Amazon is blurring the lines between its core business model and new business lines that bolster the core. Amazon means (or maybe meant) e-commerce. The argument with its hardware investments is that they enable customers to shop at Amazon. A new business line such as Amazon Web Services makes sense because Amazon has gotten so good at managing its infrastructure, they might as well offer the service to other companies as well.

Supposedly with the Twitch acquisition, Amazon can take a cut from video game revenues, serve ads, and help Amazon with digital content. But that’s precisely it. I struggle to understand Amazon’s drive for content, rather than remaining as a platform for content. The only thing I can think of is this: offer content to attract customers to Amazon Instant Video and thus pay $100 for Amazon Prime. For a cost that is estimated to reach a billion this year, that’s a very expensive customer acquisition strategy. After all, Amazon already executed a major coup with its multi-year agreement with HBO – the first time HBO content is streamed legally. This alone can already steal customers from Netflix or Hulu and attract a slew of new Amazon Primers. So what gives?

Apple, Google, Facebook and Amazon each want to be THE platform for our lives
The interactions we have with companies like Apple, Google and Facebook are almost constant and continuous. If you have an iPhone/iPad/iWhatever, Apple will work hard to keep you within its walled gardens – iTunes, iCloud, iMessage, etc. Google might be more “open,” but being that it can scan your email and access your web searches, they don’t need to work hard to keep you in. Facebook is the go-to for interacting with friends or almost-friends online for an average of 40 minutes a day, according to Facebook.

But unless you have a problem, shopping is not something you do every minute of everyday. If being THE platform is Amazon’s play then it needs to catch up. The company needs to find a place to engage customers constantly and they may have found it in video content. Nielsen reported in June 2014 that video on demand (VOD) users watch 20% more live TV than non-VOD users; Americans already watch over 5 hours of traditional television per day. Meanwhile, gamers spend an average of 22 hours a week playing video games. These are big chunks out of customers’ lives and Amazon is willing to pay to be a part of that. The question is: how long before investors start balking and lose faith in Bezos’ long-term view?

*This was originally inspired by a blog post here.

Clickbait and the weekly roundup in tech and retail

News and commentaries

More thoughts on clickbait
I wrote how I felt about clickbait in last week’s weekly roundup and incidentally, a segment on Jon Stewart’s The Daily Show also talked about clickbait with an interview with former Gawker editor, Neetzan Zimmerman. If you’re familiar with sites like Gawker and Buzzfeed, then you are one of a legion of readers who has clicked, and clicked and clicked on titles such as: “Scientists create creepy-looking mice” or listicles like “27 sex disasters you never forget.” (I’m not putting the link since I don’t want you to lose your brain cells in the process.) Zimmerman confirms how those articles are written – 15 minutes for the title and 5 minutes for the content. You can’t really blame him. In todays’ world of streaming information from multiple channels, you have to catch readers and you can’t make it too long either or else you lose their attention. Sites like Medium even state at the top of the page how long it will take to read each post.

Funny enough, when I visited Medium at this writing to get the URL, the first post I see is this 4-min read: “The Birth of MeaningfulContent.org (Why Sharethrough is investing $1M to make the Internet a better place)”, which is in response to “a burgeoning movement of storytellers embracing new digital tools to create meaningful narratives” and clickbait. I do believe that there is a market opportunity where people will pay for a curated Internet and well-written posts – to borrow the non-profit’s term, “meaningful content.” For my part, I hope you find my content relevant and I will always strive for that relevance and hopefully, meaningfulness.

Here are this week’s most relevant news in tech and retail:

In tech:

  1.  Twitter‘s stock surge after announcing 2nd quarter revenue growth of 124% (year-over-year) to $312M and 24% increase of average monthly active users
  2. Palantir Technologies, the $9B data analytics company in Palo Alto that provides services to several US government agencies, acquires Poptip, a social analytics startup and Propeller, an app-making startup
  3. Apple‘s iBeacons to roll out at Lord & Taylor stores in the US and Hudson’s Bay stores in Canada
  4. China’s e-commerce giant Alibaba is in talks with Snapchat, an app for disappearing photo messages, for a possible round of financing  at a $10B valuation
  5. Tesla records $858M revenue; loss of $62M; and a partnership with Panasonic to buildGigafactory, a massive battery plant in Reno, Nevada

In retail:

  1. Amazon to invest $2B to expand India operations in wake of Flipkart’s new financing round worth $1B
  2. Private equity firm 3i Group Plc is exploring a £200m sale of luxury lingerie Agent Provocateur
  3. Nordstrom to purchase Trunk Club, a Chicago-based men’s shopping site for $350M
  4. Kering beats second-quarter revenue forecasts, with 4% revenue increase on strength of Saint Laurent brand; buys Swiss watchmaker Ulysse Nardin 
  5. Online flash sale site Rue La La is exploring a potential sale at a $400M valuation, attracts rival Gilt Groupe

Are we in a tech bubble?

News and commentaries, Technology

Google now has an Instagram account. Some people might argue against me but I think that this signifies the encompassing relevance of Instagram these days. I remember when Facebook acquired Instagram for $1B (the amount was actually $730M due to Facebook’s stock price decrease of $31/share to $19/share when the deal was completed) and some naysayers thought that this was crazy and pointed to a tech bubble.

Consider the following:

  • Instagram had zero revenues.
  • It was only 551 days old.
  • There were 30M users which made the acquisition at ~$33/user.
  • The company had only 13 employees.

Fast forward to today and the service now has 200M monthly active users with an average of 60M photos shared per day. Since November 2013, some brands are advertising to this audience and they are supposed to be effective. Searching through Facebook’s 2013 annual report does not say how much revenue the company makes from Instagram but big-profile deals such as the one with Omnicom is valued at $40M. And Instagram is just starting. Luxury and mass-market brands use it to engage with Instagram users. It would be interesting to see how much money they will make once users can click to buy within the app.

But Instagram might be an exception rather than the rule and with recent multibillion dollar acquisitions (rumored or realized) and sky-high valuations, those people talking of a bubble must be frothing at their mouths by now.

Recent billion/multibillion dollar acquisitions:

Recent multimillion fundings:

So are we in a tech bubble? Some argue that the dotcom bubble in 2000 was caused by a bunch of companies that IPOed without a revenue stream, a business model and pushing products to a limited audience – only 51M households/51% penetration. This time, companies have some form of revenue and operating in an environment with 279M users/87% penetration in the US alone and 2.9B users worldwide. It’s for this reason that I’m in the camp of saying there is not tech bubble just yet.

Which camp are you? I’ll leave you with a June 2011 Economist Debates: Tech Bubble for a great discussion on this issue.