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Coach Aims Higher in Turnaround Push

The company is targeting the $400-plus handbag market to maintain its position in the affordable luxury space.

Coach Inc. wants to grab more of the “white space.”

This story first appeared in the April 30, 2014 issue of WWD.  Subscribe Today.

Those are handbags that retail in the $400-plus range, which will again form the core offering for the accessories giant as chief executive officer Victor Luis aims to maintain the company’s positioning as what he described as the “world’s number-one affordable luxury brand.”

Luis said in a telephone interview Tuesday following the firm’s posting of third-quarter results that “in the U.S., the $300 price bucket will be at the center, but we’ll continue to increase the number of stockkeeping units in the $400-and-above price bucket.” The ceo added that the pricing structure between $400 and the $1,500 to $2,300 entry-level range from more established European luxury brands has created for Coach “an increasingly large white space in the U.S.”

In January, the handbag and accessories firm said it was moving more upscale with its lifestyle transformation under executive creative director Stuart Vevers, targeting the $300-plus price bucket. Now it seems Coach is moving even higher. In a conference call to Wall Street analysts Tuesday, Luis said leather continued to do well, outpacing logo products across all channels. He noted, too, that the “above-$400 price bucket grew in penetration and represented 21 percent of handbag sales, with the strongest performance at the upper end of our range, $600 and higher.”

The company has been showcasing The Borough collection, which initially ranged from $378 for the mini version to $798 for the large bag. The company has since added an extra-large version of the bag for $1,000 and a weekend Borough bag for $1,200.

The sweet spot for Coach was the $400-plus range for handbags until the economic downturn that began in December 2007. Former ceo Lew Frankfort, who remains chairman, dubbed that downturn as a consumer-led recession and, in reaction, Coach began to offer product at lower price points to retain market share.

Fast-forward seven years and Coach faces competition from brands such as Michael Kors, Kate Spade and Tory Burch, all of whom are offering more handbag options below $400. The impact on Coach was particularly evident in the third-quarter results, in which profits fell sharply and total sales declined due to weakness in North American women’s handbags and accessories.

For the three months ended March 29, net income fell 20 percent to $191 million, or 68 cents a diluted share, from $239 million, or 84 cents, a year ago. Results still beat analysts’ consensus expectations of 61 cents. Net sales were down 7.6 percent to $1.10 billion from $1.19 billion. North American sales fell 18 percent to $648 million from $792 million, reflecting direct sales that were down 18 percent and comparable-store sales that had fallen 21 percent.

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For the nine months, net income fell 13.2 percent to $706.1 million, or $2.51 a diluted share, on a net sales decline of 4.7 percent to $3.67 billion.

Weakness in the core handbag and accessories businesses was offset by gains in men’s, footwear and the overseas markets in Asia and Europe.

Luis noted that the company will be “launching men’s footwear holistically in the fall.”

Coach continues to expand in China, which remains its largest single country opportunity. The company already has a presence in 52 cities in the country. Also a growth opportunity for Coach is Europe, which represents a $6.5 billion to $7 billion market in the premium handbag and accessories category, according to Luis.

While opportunities overseas abound, the firm has to fix its North American business, which is expected to get a boost later this year when the sales floors begin showing the first collection from Vevers.

Jefferies analyst Ronald Konik has a price target of $48 for shares of Coach, and a “hold” rating, noting that the “story depends upon a reinvigorated merchandise assortment reviving the brand.”

Coach is expecting a fourth-quarter sales decline of about 10 percent. There was no guidance for fiscal-year 2015, other than that the company expects sales to be down.

Sterne Agee analyst Ike Boruchow noted that even when Vevers’ first collection hits the stores in the fall, it’s not a “quick fix,” since it will “take time to build customer awareness [and] engagement for the new merchandise. Also the factory channel will not begin receiving Vevers-influenced product until the spring [of 2015].” Boruchow concluded that North American sales trends are not likely to “snap back” this fall.

Shares of Coach fell 9.3 percent to close at $45.71 in Big Board trading.