Affordable luxury retailer Coach’s (NYSE:ANF) stock has crashed by roughly 19% Tuesday after the disclosure of Q4 fiscal 12 sales results.  The reason for the decline was its North American comparable sales growth missing market expectations. We believe the increasing competition in the handbags category particularly from Michael Kors Holdings and an ill-timed move to eliminate coupons from its U.S. factory stores were the primary reasons behind this decline. 
Coach is the leading American marketer of luxury lifestyle handbags and other fashion accessories and competes with premium apparel and accessories players like Ralph Lauren (NYSE:RL), Liz Claiborne (NYSE:LIZ), Michael Kors (NYSE:KORS) and Ann Taylor (NYSE:ANN).
Lower comps in North American factory stores channel hurt Coach
While Coach reported an increase of 12% and 19% in its Q4 revenues and operating income respectively, a lower than expected comparable sales growth of 1.7% in North American business drove Coach shares down nearly 19 percent. A slower growth in factory stores was the primary catalyst behind this decline, as summed up by Coach’s CEO Lew Frankfort during the earnings call.
We believe a slowdown in North American factory stores channel was primarily due to two major reasons. Firstly, the company is facing intense competition from Michael Kors Holdings in the handbags and accessories categories. With a lower pricing point strategy and aggressive promotional scale, Michael Kors has emerged as a significant threat to Coach’s market share in North America. A continuing promotional environment in North American luxury apparel market may cause Coach to lose further market share to Michael Kors in the times ahead.
Secondly, a major part of comparable sales decline in factory channels was self-inflicted by Coach. During the earlier part of this year, the company discontinued in-store coupon program in its factory stores channel.
While the company made this move in order to improve its Average Unit Rates (AUR) in factory stores, the move was quite ill-timed and backfired. Coach’s factory store customers, who are accustomed to in-store coupons started distancing themselves from the company once in-store couponing was discontinued. Simultaneously, Coach’s competitors also increased the scale of their promotions, thus taking away a major chunk of Coach’s customers. While the company did realize this, and started the in-store couponing again within a few weeks, the damage had already been done with a loss in market share.Notes: