Coverage: Coach buying Stuart Weitzman

Coach is looking to expand and combat slumping handbag sales by spending $574 million on shoes – Stuart Weitzman. While it is trying to combat a drop in sales, Coach may not have found the way to solve the problem.

The New York Times story by Hiroko Tabuchi and Michael J. de la Merced had these details about the sale:

Coach, the New York-based luxury fashion house, said on Tuesday that it would buy Stuart Weitzman, the maker of midrange luxury shoes, for up to $574 million in cash. Coach also said it would retain Mr. Weitzman, the company’s 72-year-old executive chairman and creative director, to lead the team whose styles have been in high demand on red carpets and in stores.

The acquisition is a rare move by Coach, which has so far preferred to expand its global business organically, from $953 million in sales a decade ago to almost $5 billion last year.

But Coach’s mainstay handbag business has slumped recently in the face of stiff competition as the demand for exclusive, pricier lines of luxury handbags soared.

A troubled outlet store strategy also weighed on the company’s bottom line and took some of the luster off Coach’s image.

Maggie McGrath pointed out in a piece for Forbes that Coach is facing intense competition:

In the face of competition from popular brands like Michael Kors and Kate Spade, luxury handbag maker Coach has struggled to maintain its cachet with consumers. Its sales in North America fell 19% during the company’s first fiscal quarter of 2015, and its stock lost more than 30% of its value in 2014 trading. But Tuesday morning, the retailer took an important step to getting its cool factor back: it announced that it will acquire shoemaker Stuart Weitzman, a company whose creations have been called everything from ”the trendsetter boot of 2014″ to, simply, “the It Shoe.”

Ending weeks of speculation, Coach said Tuesday that it will pay private equity firm Sycamore Partners $530 million in initial cash payments to acquire Stuart Weitzman (the company is part of Sycamore’s portfolio); upon the achievement of certain revenue targets over the next three years, Coach will give Sycamore up to $44 million in contingent payments.

Sarah Halzack wrote for The Washington Post that some are questioning if the purchase will be a good one for Coach:

The acquisition of Stuart Weitzman brings into Coach’s stable a brand that pulled down $300 million in sales in 2014 and that has seen steady growth for the last five years.  But analysts are questioning whether the deal might be more of a distraction for Coach than a solution.

“Under normal circumstances, a leading American handbag brand acquiring a leading American footwear brand would be a reasonable strategy, but [Coach] may have too many balls in the air right now,” said Ike Boruchow, specialty retail analyst at Sterne Agee, in a research note.

Indeed, Coach has a multi-pronged “transformation strategy” in place to try to reinvigorate its storied brand, which last quarter saw a 24 percent drop in sales at North American stores open more than a year.  Coach has brought in a new creative director, Stuart Vevers, whose first collection for the brand hit stores this fall.  In June, the company announced it would be redesigning its stores, cutting back on promotional pricing and adding more expensive items to its product assortment.

Coach also has said it sees significant growth opportunity outside of its core handbag business into other categories, including footwear.  This is one reason the acquisition could prove fruitful, analysts said: Stuart Weitzman is known for its technical prowess in shoe-making, and Coach could put that know-how to use as it expands its own footwear offerings.

But Fortune writer Phil Wahba did say that some analysts thought the move was a good one:

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, 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.

Typically an acquisition takes up executives’ time and attention, making it hard to focus on a turnaround. Coach is obviously struggling to figure out how to combat its competition. Stuart Weitzman is an amazing brand, here’s hoping Coach can capitalize on the purchase.