Coach Inc. (NYSE:COH) is a leading American marketer of luxury lifestyle handbags and other fashion accessories for both men and women. It is one of the well-known accessories brands in the U.S. with a presence in select international markets and is widely perceived as an affordable luxury brand. As Coach provides luxurious accessories at reasonable prices, it is more likely to attract the customers than its competitors.
Coach has a presence in two of the world’s largest economies, i.e. China and Japan, and the retailer has witnessed substantial growth in the Chinese market and its men’s business. This is helping drive international sales, which now account for around 30% of total sales. Due to this, Coach plans to aggressively expand in China and open more dedicated men’s stores. Here we discuss some of the factors that are impacting Coach’s overall growth.
Increasing Demand For Luxury Goods In China and other emerging markets
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Luxury consumption in China has seen double digit growth in recent years as a result of rapid economic growth and rising standards of living in China. Despite weak macro-economic conditions globally and a threat to China’s economy from surging inflation, luxury goods sales continue to grow strong in China. The Chinese market is expected to become the largest luxury market by 2014, comprising an estimated 23% of the world market, thereby providing tremendous growth potential.
Other emerging markets, including Brazil, South Asia and Central Asia will experience a 25-30% surge in spending on luxury goods in the next five years as personal wealth, spending capacity and fashion consciousness increase in these markets. Emerging markets will also see the highest growth in new openings of directly-operated stores in the coming years. Currently, China contributes about 10% to Coach’s revenues.
Consumer Shift To Affordable Luxury
Affordable luxury brands and private labels have held up solidly during the weak market conditions while luxury and premium end companies, including Louis Vuitton and Hermes, reported slowing sales. The luxury market has been hit by a renewed sense of consumer ethics, which has seen some consumers turning away from the luxurious lifestyle to take on a “less is more” approach.This trend was observed even before the economic downturn. With consumers shying away from luxury items, hinting that consumers may not return to buy luxury goods in the near future and may opt for more sober choices.
Focus On Men’s Business
The men’s business has proved to be quite lucrative for Coach and has registered substantial growth. The retailer is remodeling its stores to include men’s accessories as well. At the end of its last quarter, Coach had a total of 100 stores with men’s assortments in them. Moreover, the expansion plans in the North American as well as Chinese market include stand-alone men’s stores and dual gender stores.
Our price estimate for Coach stands at $68, implying a premium of about 15% to the market price.