“For the foreseeable future, outerwear and footwear offer the next most significant opportunities for us to both grow and create value,” Victor Luis, Coach’s chief executive officer, said in a telephone interview following the release of the group’s second-quarter results.
He added that for brands in the soft fashion categories, consumers — when they like the brand — are more willing to pay full price for outerwear and footwear than for many other items. Luis also said because Coach is a house of leather, it was more credible for the firm to extend into the outerwear category than to expand in other segments.
“Our business in outerwear is relatively small, so all of it [represents] a growth opportunity for us,” he said. “If you look at the size of the global opportunities, apparel is much larger. In handbags, it’s $41 billion in global sales. For footwear, it’s $28 billion and for outerwear it’s $10 billion. Those three categories represent an $80 billion global opportunity. In the broader apparel market, it’s much larger, but the margins are thinner and the prices lower as well, and much more so if you are in basics, such as Ts, bottoms and jeans where [those products] are much more price-driven.”
Coach in the past expanded its focus to footwear and went on to acquire Stuart Weitzman — the learnings and know-how from the acquisition will enable Coach to take the Coach-branded product line in-house when the Jimlar license expires this year. But don’t expect Coach’s next deal to necessarily be an outerwear brand, even though Luis has said that category might be a prime area for an acquisition if the right opportunity came up.
Luis had no comment on the speculation that Coach might be considering an offer for aspirational luxury brand Kate Spade. He said handbags, footwear and outerwear all could be areas with an acquisition opportunity, emphasizing that “first and foremost, Coach is looking for great brands where it has confidence there’s room for growth, as well as where the Coach team can add value. That is our most significant filter.”
That expanded on Luis’ remark during a conference call to Wall Street during which he told analysts that Coach is “not interested in turnaround plays.”
Luis said the company decided to focus on handbags, footwear and outerwear after reviewing the results of a broad study it completed over a long period of time. He spoke about a key goal, which is to identify where there is “value creation opportunity for the Coach brand and for Coach Inc.”
While within luxury there are other segments of the business, such as watches and jewelry and cosmetics, as well as cut-and-sew in apparel, Coach isn’t focusing on those segments at this point.
While some manufacturers have been looking to lessen their reliance on outerwear, given the unseasonably warmer winters over the past two years, Coach is looking to make it the third key category for its product offerings.
In the telephone interview, Luis further explained what it might mean to be a multibrand luxury firm. According to the ceo, the company is focused on executing organic growth for the Coach and Weitzman brands. It hasn’t thought about any specific number of brands under its umbrella, nor has it ruled out the idea of an aspirational luxury brand, even though handbag price points are moving a bit higher for the high-end designer 1941 Collection. Within certain handbag silhouettes, depending on leathers used and novelty executions, price points for the Rogue bag are now $795 and $895, with a few styles hitting $1,200 and $1,400. The entry point, Rogue 25, was $550 and now starts at $595.
“Luxury is not about a specific price point, nor about a specific luxury positioning. It is not about a specific geography. It is truly about great brands, brands that have room to grow,” Luis said.
While he noted that Coach’s core competency is in handbags and footwear — giving it the ability to bring sourcing capability to an acquisition — Luis also said in its evaluation that “each brand we look at may be bringing something to us.”
Andrea Resnick, the global head of investor relations and corporate communications, and interim chief financial officer, said during the conference call to Wall Street analysts that strategic acquisitions are about growth, adding, “There is nothing imminent.”
Coach’s quest to expand in footwear and outerwear comes at a time when, according to Boston Consulting Group, the luxury markets are undergoing a structural change. That said, the initiatives the company has implemented over the past few quarters — from investing in a new store concept to pulling back on department store doors and store promotions — appear to be on the right track.
As evident of that, Coach on Tuesday posted a 17.4 percent increase in second-quarter net income to $199 million, or 71 cents a diluted share, on a 3.8 percent gain in net sales to $1.32 billion. On an adjusted basis, net income was 75 cents a diluted share. That was enough to beat Wall Street’s diluted earnings per share estimate by 1 cent, and meet forecasts for net sales.
Investors were certainly happy, sending shares of Coach up 3.8 percent to close at $37.35 in Big Board trading.
Digging a little deeper, total North American Coach brand sales rose 2 percent on a constant currency basis, while North American direct sales rose 5 percent for the quarter. And North American comparable-store sales rose 4 percent, but were up 3 percent including the negative impact of e-commerce. That still represents the third consecutive quarterly increase in comps for the company. Internationally, Coach brand sales rose 3 percent, while the Stuart Weitzman brand saw sales increase 25.5 percent.
“Our results point to the continued traction behind our brand, such as the important investment in our stores [and] the marketing behind our brand,” Luis said in the interview.
The company renovated 46 locations during the quarter, including four directly operated sites in its North American business, bringing the total to 540 modern luxury concept stores globally across all channels.
The ceo also noted how the company has had just three runway shows so far, with the upcoming February show its fourth season to date. Those shows and the hard work of the Coach teams have had an impact on the brand and the perception of Coach, Luis emphasized.
“More than ever, we certainly want to be taken seriously in the fashion community,” Luis said, adding that the hard work has been about “gaining fashion credibility.”
More recent moves, such as partnering with actress and style trendsetter Selena Gomez as a brand ambassador and leveraging her social media followers, will help to broaden the brand’s consumer base. Gomez is expected to cue in a Millennial following for the Coach brand.
The company rationalized its North American department store distribution by taking down its door count by 25 percent. Luis said Coach is on track to pull out of 250 department store doors by the end of the fiscal year, with about half already closed.