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.
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.