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Coach’s Stuart Weitzman Purchase: Why It’s Bad For KORS

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Advantage Coach?

Although Coach currently has a licensing deal with Jimlar for footwear, the Stuart Weitzman acquisition is likely to accomplish several objectives:

  1. a new premium brand – a world-class footwear brand to add to its collection
  2. expansion of the company’s brand portfolio in footwear – a particular advantage as it looks to become a lifestyle brand. Coach will also get better access to upmarket department stores such as Nordstrom (JWN) and Saks Fifth Avenue
  3. greater access to European markets
  4. margin expansion – Weitzman products are far pricier on average than Coach’s current offerings. This will improve margins, if only slightly. Stuart Weitzman’s annual revenues are in the vicinity of $300 million, significantly lower than the $4.8 billion reported by Coach
  5. continuity – Stuart Weitzman and the management team are expected to continue on with the company after the acquisition. The footwear business is currently not a core business for Coach, so this is a good thing

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Downsides

On the flip side, the acquisition may mean the diversion of additional resources to handle the integration process. It may also frustrate Coach’s attempts to regain market share in the North American (SPY) market, where it reported a decline of 24% in same-store sales in 1Q15.[1. Fiscal year ending June 30, 2015, quarter ending September 27, 2014]

Market reaction

Coach’s (COH) share prices dropped 1.2% after the deal was announced, likely due to the above-mentioned concerns. In contrast, the S&P 500 Index (SPY) (IVV), dropped 0.9% as crude oil (USO) (OIL) prices fell below $50 per barrel, the lowest in nearly six years.

Having said that, Coach’s main rival in North America, Michael Kors (KORS), recorded a sharper drop in price when it fell 8.4% on January 6.

Raising Coach’s brand profile and improving its product selection, as well as opening up the European market, are all positives for the company.

The company’s efforts may even adversely impact KORS’s expansion efforts in Europe. KORS is already trailing Coach in another key market, China. Doing more business in Europe will probably expand Coach’s e-commerce advantage over KORS. Stuart Weitzman’s e-commerce sales are estimated to be worth ~25% of annual revenues,[1. Internet Retailer] which is high, especially for a luxury brand.

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