DSW, CAMUTO GROUP & ABG UNION DRAWS MIXED REACTIONS

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

DSW Inc. and Authentic Brands Group revealed last week an unprecedented deal for the industry. The former, a retailer, and the latter, a brand management firm, will partner to snap up several facets of Camuto Group

— a business comprising several brands.

The news sent DSW shares tumbling as investors presumably displayed their uncertainty around the complicated nature of the agreement as well as Camuto’s recent struggles with profitability. (The firm is just a year outside of a failed merger with Aldo Group.)

DSW agreed to pay $200 million to acquire all of Camuto Group’s global production, sourcing and design infrastructure 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 shoe 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. Finally, DSW 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.)

The total amount paid to Camuto Group will be $375 million.

“It’s pretty well-known 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 … [meaning that] this is new territory for them, and it creates some risk, which [worries investors].”

Coming off several quarters of unevenness, the Ohio-based family footwear seller this year appeared to be finding its footing, posting in August robust Q2 revenue growth of 16 percent to $795 million. Now some market watchers are concerned 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 … 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.”

Canaccord Genuity Inc. analyst Camilo Lyon last week 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.”

ABG — which 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.

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. “DSW has been considering building out an operational structure that would allow for private-label — currently 10 percent of sales — in-house sourcing capabilities,” Marotta said. “Considering the massive costs associated with executing the project organically, it was ultimately an impractical gambit.”