Because Coach (NYSE:COH) is known primarily for its iconic leather handbags, it's easy to forget the 74-year-old company's ambitions extend much further. On Friday, Coach investors received a whiff of that ambition when it announced a new 11-year exclusive license agreement with fragrance specialist Interparfums SA.
Under the deal, which begins after Coach's existing five-year contract with Estée Lauder (NYSE:EL) expires in June, Interparfums will "create, produce, and distribute new perfumes and fragrance-related products, including new men's and women's scents." Then, beginning fall 2016, Interparfums will distribute those fragrances globally to various stores including Coach retail locations. Coach, for its part, will receive royalties from Interparfums based on net sales of any Coach-branded merchandise.
That's not to say Estée Lauder did anything wrong. According to Coach CEO Victor Luis:
We've been pleased with the performance of our fragrance business since our launch. As our brand transformation continues to progress, and with Interparfums as our partner, we know we can leverage this category into a much larger global opportunity. Given Interparfums's successful track record of cultivating and growing fragrance lines for fashion and luxury goods brands they were the ideal choice to take our business to the next level.
Meanwhile, Interparfums CEO Philippe Benacin promised his company would not only develop new fragrances that "capture the spirit of the Coach brand," but also leverage their world-class distribution network for "taking the portfolio to a larger audience."
Seems fair enough. Coach's most recent annual report states the company recognized just $27.9 million in total licensing revenue last fiscal year -- or less than 1% of total net sales. And that included not just licensing from its Estée Lauder fragrance line, but also from Coach-branded watches made by Movado, footwear produced by Jimlar, and eyewear through its deal with Luxottica. Curiously, the first two of those deals expire later this year, while the third will be up for grabs in 2016. In any case, given the relatively small capital outlay such licensing agreements require, it makes sense to find the best possible partner to capitalize on what should be a relatively easy opportunity for incremental revenue.
A conflict of interest?
Of course, I'm not intimately familiar with Estee Lauder's distribution network, so can't speak to the specifics of how it compares with that of Interparfums. With that in mind, I also can't help but wonder whether Coach's decision was influenced by the fact Estee Lauder launched fragrance lines in 2013 for Coach competitors Tory Burch and Michael Kors (NYSE:KORS).
After all, the meteoric rise of brands like Michael Kors -- which enjoyed impressive 29.9% year-over-year revenue growth last quarter as Coach sales fell 14% -- is one of the primary reasons Coach had to initiate the costly, multi-year "brand transformation" Luis mentioned in his statement above. Coach so far has closed dozens of underperforming retail stores in North America as part of that transformation, while also implementing various other operational efficiencies, realigning inventory levels, and updating its global store fleet.
If all goes as planned, however, Coach should emerge a stronger business poised to better compete with its up-and-coming peers. And in the end, patient investors shouldn't underestimate the role supplementary revenue streams like this global fragrance line can play in fulfilling that potential.
Steve Symington owns shares of Coach. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.