Market Watchers Tackle the Complicated Marriage of DSW, Camuto Group & ABG

Another footwear megamarriage is close to sealed — but this time, it’s complicated.

DSW and Authentic Brands Group announced today a nearly unprecedented deal — in which the former, a retailer, and the latter, a brand management firm — would partner to snap up several facets of Camuto Group — a business comprising several brands.

The news sent DSW shares tumbling — ending the trading day down nearly 13 percent to $28.51 — as investors likely displayed their uncertainty around the complicated nature of the deal as well as Camuto’s recent struggles with profitability. (The firm is just a year outside of a failed merger with Aldo Group.)

“First and foremost, it’s pretty well known that Camuto has had some challenges and that the brand was available and obviously looking for financial support,” explained Wedbush Securities analyst Christopher Svezia. “Couple that with the fact that DSW is [predominantly] a retailer, and here they are acquiring sourcing expertise, distribution and brand attributes that they didn’t have before. This is new territory for them, and it creates some risk, which [worries investors].”

Coming off several quarters of unevenness, DSW this year appeared to move closer to finding its footing, posting in August robust Q2 revenues of $795 million — a gain of 16 percent and well above consensus estimates for 1 percent growth. Digital advances had also bested the firm’s competitors, ballooning 52 percent year over year.

Now that DSW is putting some of its resources behind a new business venture, some market watchers are concerned that its recent gains will be jeopardized.

“This new deal dilutes DSW’s focus on its core business, which is finally starting to improve — that’s where they should [place their attention] rather than doing Town Shoes of Canada and this [Camuto] thing,” said Susquehanna Financial LLLP analyst Sam Poser. “This will prove over time to be a distraction and not deliver what they want it to deliver.” (DSW said in August that it would shutter its Town Shoes business, closing all 38 locations by the end of the fiscal year in order to focus on its three biggest businesses: Shoe Company, Shoe Warehouse and DSW Designer Shoe Warehouse.)

For his part, Canaccord Genuity Inc. analyst Camilo Lyon today reiterated a hold rating on DSW’s stock, citing several concerns over the pending transaction.

“DSW overpaid for what seems to be a very low asset base — there’s no real asset supporting the business they bought,” Lyon said. “They bought a sourcing operation, which is effectively an office in China and its [workers], some working capital for inventory and a 40 percent stake of licensing revenues. So $256 million for that is a very high price to pay for what is expected to be dilution for at least the next year — and likely even longer.”

Under the terms of the agreement, expected to close in 30 days, DSW agreed pay $200 million to acquire all of Camuto Group’s global production, sourcing and design infrastructure — including operations in Brazil and China, and a distribution center in New Jersey — in addition to existing working capital of around $100 million. It will also take on the licensing rights for the Jessica Simpson footwear business, as well as the footwear and handbag licenses for Lucky Brand and Max Studio.

It will also procure joint-venture participation in the ED Ellen DeGeneres and Mercedes Castillo brands managed by the Camuto Group. Finally, the Ohio-based family footwear seller agreed to pay $56 million to acquire a 40 percent stake in the intellectual property of Camuto Group’s proprietary brands. (Camuto CEO Alex Del Cielo will stay on to lead that company, which will continue to be based in Connecticut.)

Authentic Brands Group, which continues to move deeper into footwear — it reportedly beat out DSW to procure the Nine West and Bandolino footwear and handbag businesses at a bankruptcy court auction this summer — is taking the majority stake, of 60 percent, in Camuto’s intellectual property. (ABG is owner and licensor for a range of lifestyle, celebrity and entertainment brands including Frye, Juicy Couture, Elvis Presley and Marilyn Monroe.)

For what its worth, DSW has been an early adapter in omnichannel and experiential concepts across footwear retail. The firm moved quickly to launch progressive concepts like buy online, pick up in store and to leverage its stores as distribution centers to upend digital competition. According to Simon Nankervis, DSW chief commercial officer, this deal falls in line with a larger strategy to expand and strengthen its business.

“DSW’s long-term opportunity is to strategically gain share in markets with the most attractive growth prospects, including direct-to-consumer,” Nankeris said. “We had been searching for the right acquisition to propel this growth and ensure our long-term health as a company.  We saw it as fortuitous timing that Camuto Group was pursuing a sale to ensure its own long-term growth. They have an outstanding reputation in the industry — a true testament to Vince’s legacy.”

He added, “We believe in the power of the partnership because our strengths complement each other so well. For example, DSW’s retail and e-commerce expertise will complement Camuto Group’s digital operations.”

Indeed, CL King and Associates analyst Steve Marotta was upbeat on the deal, citing its potential to grow DSW’s private-label business — something the firm has been after for some time.

“For the last year or so, DSW has been considering building out an operational structure that would allow for private label — currently 10 percent of sales — in-house sourcing capabilities, weighing against, conversely, acquiring the same,” Marotta wrote in a memo today. “Considering the massive costs associated with executing the project organically … building out was ultimately an impractical gambit. While the size and scope of the Camuto acquisition is certainly beyond what would have otherwise been a narrower internal project, the long-term benefits of a well-known brand portfolio, proven sourcing and design competency, and an existing revenue stream to fund the infrastructure tees up this transaction to be less risky than the alternative.”

Still, Poser, Lyon and Svezia each expressed concern around how DSW’s partnership with Camuto would impact the latter’s relationships with retailers such as Dillard’s and Nordstrom. (Camuto-owned brands such as Vince Camuto, Louise et Cie, Sole Society and Enzo Angiolini are also included in the deal.)

“I don’t know what Nordstrom thinks about DSW controlling some aspects of a brand they sell, but in the near term, Camuto having the liquidity and infusion [from DSW] probably helps reassure [Nordstrom and others] about things like product deliveries and air freight,” explained Svezia. “But down the line, these retailers may feel that they’re not crazy about this sort of arrangement since DSW is a competitor.”

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