With Cole Haan sale, Nike can focus on more important things, analysts say
And just what might that be?
It can probably be summed up in terms of geography: China, Europe and Brazil.
When the company announced plans May 31 to sell dress shoe company Cole Haan as well as Umbro International Ltd., a soccer footwear and apparel brand, Nike said it was doing so to focus more on its core businesses.
Given the challenges the company faces in the year ahead as well as opportunities down the road, Nike's focus is likely to be on those three key geographies, analysts said.
Nike is also selling Cole Haan because the dress shoe company was never quite a comfortable fit with the sporting good company. With cash freed from the Umbro and Cole Haan sales, Nike will be able to spend it in areas that make more sense, the analysts suggested. But that likely would not include another acquisition.
After weeks of speculation, Cole Haan is going to Apax Partners for $570 million -- a price that is about $70 million more than the amount bandied about in the financial media. Nike purchased Cole Haan for $95 million in 1988.
Friday's announcement followed another on Oct. 24 that Nike would sell Umbro to Iconix Brand Group for $225 million, a transaction expected to be completed by the end of the year. Nike purchased Umbro for $582 million in October 2007.
China undoubtedly is commanding Nike executives' attention for slowing sales and growing inventory in an important region for future growth, said Christopher Svezia, analyst with Susquehanna Financial Group.
In reviewing first quarter results in late September, Nike executives frequently referred to challenges the company faces in China. Advance orders surged in every geographic region, they said, except in China where they dropped 6 percent.
"The economy is slowing," Nike Brand president Charlie Denson said, "creating short-term impacts for any company doing business there."
Europe's economic woes also have slowed sales for Nike.
"There are still a lot of questions on currency and debt," in Western Europe, Denson told analysts. "And we continue to monitor our business and the broader economic landscape to appropriately manage risk."
Nike, which specializes in shining a product spotlight during global events, has two in its sights in Brazil: the 2014 World Cup in 12 Brazilian cities and the 2016 Olympic Games, to be based in Rio de Janeiro.
In past World Cups and Olympic Games, Nike has favored spending part of its vast marketing budget on sponsorships of athletes and federations instead of an umbrella sponsorship for the event itself.
Adidas was the official footwear and apparel sponsor for the most recent World Cup in South Africa and Summer Olympics in England. However, Nike recently announced it had seized the rights to outfit the International Olympic Committee, starting in January.
While Nike grew Cole Haan, the Maine-based company never seem a good fit for Nike, said Paul Swinand of Morningstar.
"The big question is why (Nike) ever thought it would be a good idea to own a brown shoe company," Swinand said, using a term to describe dress shoes.
It was a questionable fit for other reasons, said Sterne Agee analyst Sam Poser.
In the early going of the merger, "they were having trouble with the (Nike) Air technology because they kept screwing up the fit of the shoes," said Poser, a one-time buyer for Bloomingdale's.
"They're not a dress shoe company," Poser said of Nike, "they're an athletic shoe company."
Svezia, Swinand and Poser called the proposed sales price about right as it followed a rule of thumb sometimes followed in such deals: a price equal to the most recent annual revenue. Cole Haan's sales were $535 million in the fiscal year that ended May 31.
In its own announcement Friday, Apax noted that a former Nike employee, Jack Boys, would be taking on an unspecified role "to grow the Cole Haan brand in the U.S. and internationally." Boys was chief executive of Converse when Nike bought that company. He left Converse in 2009.
It wasn't clear from Friday's announcement whether Cole Haan would be allowed to continue to use Nike technology in its products. Nike's air bags and Lunarlon soles have been used in past designs.
"As we have done with past transactions," Nike spokeswoman Mary Remuzzi said, "there will be a transition period for continued use of the technology by the buyer."
The Cole Haan transaction is expected to be early next year.