The luxury handbag and accessories company is buying Stuart Weitzman Holdings LLC from private equity firm Sycamore Partners for about $530 million.
Coach Inc. will also make up to $44 million in contingent payments to Sycamore Partners if certain revenue targets are hit over the three years after the deal closes.
The deal is expected to bolster Coach's image while creating growth opportunities as it struggles to turn around its brand under new CEO Victor Luis, who took the post in January 2014. For Stuart Weitzman, the deal will expand its business overseas.
It's a rare acquisition for Coach, which has long grown internally. While analysts praised the deal, some worry that it could be a distraction to its core business, especially when efforts so far to rework the designs haven't seen much traction.
"(Coach) may have been better served keeping its sole focus on its own transformation, of which we are seeing some progress, but believe still has many legs to unfold," wrote Randal J. Konik, equities analyst at Jefferies in a report published Tuesday.
Coach has been suffering as shoppers defected to brands like Michael Kors and Kate Spade for handbags that are edgier but are priced similarly. Coach has had five straight quarters of sales declines including the last quarter ended Sept. 27 when total sales were down nearly 10 per cent. North American sales fell 19 per cent for the quarter.
But this past holiday shopping season, the intensity of promotions of handbags increased, according to a Credit Suisse report. In fact, Michael Kors' shares dropped more than 8 per cent Tuesday after Credit Suisse's Christian Buss reduced the company's stock rating, citing an increase in discounting at the brand this holiday season.
Coach previously announced it plans to close about 70 underperforming stores in fiscal 2015. Last year, the company hired British designer Stuart Vevers to inject new life into the brand. His debut handbag collection for Coach hit stores last September.
Coach has been trying to diversify, but handbags still account for the bulk of its business. For the year ended June 28, women's handbags accounted for 55 per cent of total annual sales of $4.8 billion, while other products like footwear and jewelry made up 9 per cent of total sales. Women's accessories, which include cosmetic bags, made up 22 per cent of its total business, while men's products accounted for 14 per cent, according to its regulatory filings.
Stuart Weitzman had about $300 million in revenue for the 12 months ended Sept. 30, 2014. The brand is currently available in 70 countries. Its products are sold in fine specialty and department stores globally and in its own retail stores in the U.S. and Europe.
"We are excited to be working with the Coach team and leveraging its strong infrastructure to help us drive efficiency and expand our product mix to an even broader consumer base worldwide," Stuart Weitzman, creative director and executive chairman of Stuart Weitzman Holdings, said in a statement.
Weitzman will remain in his roles with the company.
New York-based Coach said it will finance the deal with available cash and other sources of financing available to it in the credit and capital markets. The acquisition is expected to add to its earnings per share, excluding transaction-related costs.
The deal is expected to close by May.
Coach's stock slipped 43 cents, or 1.2 per cent, to $36.30. Its shares are down 35 per cent over the past year.
Michael Kors Holdings' shares fell $6.13 to $66.87.