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Coach Sees Better Holiday Ahead

Fourth-quarter profits fall 31.7 percent for Coach, and sales slip 0.5 percent.

Coach’s new lifestyle collection aimed at the younger demographic.

Coach Inc. is sticking with its more value-driven pricing in anticipation of a holiday season that will be better than last year’s but not up to the more lofty level of 2007.

This story first appeared in the July 29, 2009 issue of WWD.  Subscribe Today.

Following the company’s report of a 31.7 percent decline in fourth-quarter earnings, Lew Frankfort, chairman and chief executive officer of Coach, told WWD that consumers in recent surveys by the firm were “somewhat less pessimistic” in their outlook.

“As their confidence grows, and over time, they will spend more,” he said. “For Coach, July was a strong month.”

He said retail in general hit bottom in December 2008. He predicted this coming December will be “materially better for American retailers. We will see more spending than last December.

“Will consumers be spending at the same level as December 2007? Absolutely not,” he said.

Frankfort referred to the slowdown in spending as a “consumer-led recession” in January 2008, long before the credit meltdown and the recognition the country was in a recession. In response, the company started earlier than most to fine-tune its assortment and price points to mesh more closely with customer demand.

Last year, Coach began introducing handbags at under $300, initially comprising 30 percent of the mix and gradually increasing to 50 percent today. Frankfort sees no reason to change that.

“We plan for the indefinite future to maintain pricing at this level,” he said, adding the Poppy, Tribeca and Garnet collections “are strategically priced between $200 to $300, and doing well. Our peak performance in handbags in unit penetration was in 2007 when the sweet spot was in the $200 to $300 range. As we moved to the $300 to $400 range, and as the economy worsened, our productivity level in handbags declined.

“In the new normal,” the ceo said of the new consumer mind-set, “we are offering a more compelling value that is designed into these price points. We are working with our raw material suppliers and manufacturers to maintain our excellent margins.”

According to David Duplantis, senior vice president of retail, Internet and catalogue, the average purchase is $290 at full-price stores, compared with $150 at the company’s outlet stores.

For the three months ended June 27, Coach’s net income fell to $145.8 million, or 45 cents a diluted share, from $213.5 million, or 62 cents, in the year-ago quarter. Sales fell 0.5 percent to $777.7 million from $781.5 million.

While the earnings per share result was 2 cents better than consensus estimates, shares of Coach fell 38 cents, or 1.3 percent, to close at $28.05. They were downgraded to “hold” from “buy” by Lazard Capital Markets analyst Todd Slater on Monday, contributing to a 3 percent drop based on the uncertain status of the business.

The company said sales were lower due in part to reduced shipments into U.S. department stores, where sales fell 30 percent for the quarter. Retail and other direct-to-consumer sales rose 3 percent to $683 million, while North American comparable-store sales fell 6.1 percent. Indirect sales dropped 21 percent to $95 million.

For the year, Coach’s net income declined 20.4 percent to $623.4 million, or $1.91 a diluted share, from $783.1 million, or $2.17, in the prior year. Sales gained 1.6 percent to $3.23 million from $3.18 billion.

Of the new collections, Coach has initiated an extensive launch and marketing campaign for its Poppy line aimed at the younger consumer. In Japan, Coach tested a pop-up store in an Isetan flagship at its Shinjuku site in Tokyo, an area where the brand doesn’t yet have any freestanding stores. Frankfort said the test in a 900-square-foot area, called the “World of Poppy,” did $250,000 in volume in one week.

He’s eyeing similar pop-up sites down the road in China, where the company expects to have 15 new locations this year and open a total of 50 new stores over the next five years.

Coach would use the pop-up concept for future introductions, but the criteria would be for lifestyle collections that have both breadth of presentation and the ability to stand alone as a subbrand, Frankfort explained.

With $800 million of cash on its balance sheet and no debt, the firm is positioned for expansion and, as reported in WWD Tuesday, has unveiled plans to fund a new fashion enterprise designed by, and bearing the name of, its president and executive creative director, Reed Krakoff.