Can Coach Rebuild Its Brand Image With New Promotional Strategies?

COH: Coach logo
COH
Coach

Leading luxury retailer Coach (NYSE:COH) has announced that it plans to close as many as 70 stores in North America. [1] The company, which operated 351 full price stores and 193 factory stores in North America as of June 2013, had been facing criticism for diluting its brand through a high outlet presence. [2] The closure of these stores will reduce its North America store count by 13% and the global store count by 7%. The company will also be combining 13 standalone men’s stores with existing women’s stores. [1] This announcement comes on the heels of a quarter in which revenues from the company’s North America operations fell by 18% for the quarter with comparable store sales declining by 21%. [3] The company management attributed this decline to the overall retail slowdown from weather and the Easter shift. While a part of the decline was attributable to the overall slowdown in retail spending, the rest of it was of a piece with the poor performance of Coach’s women’s handbags and accessories business over the last few quarters.

Read our complete analysis for Coach, Inc

Coach’s Brand Image Has Suffered

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Over the last 5 years, Coach has grown its annual revenues from $3.2 billion to $5.1 billion. The luxury retailer achieved this revenue growth through a 40% expansion in its store count and a ~15% aggregate growth in comparable store sales. However, the company achieved these results with a reduction in its gross margin from 28.1% to 27.1%. [4] One reason for the reduction in margins was the increase in the contribution of sales from factory outlets to overall retail sales, from 40% a decade ago to 70% by the end of fiscal 2013. This meant that even as the company was trying to prop up its brand through its flagship stores channel, it was depreciating it through the factory stores channel. Coach’s products are available at prices 25% lower than at its full-price stores. ((Coach to Discount Products at Stores in Break With Tradition, Bloomberg, June 2014)) By offering these discounts, Coach was available to pull non-luxury buyers into its market space but ended up alienating its core audience, which in turn has migrated to competitors like Michael Kors and Kate Spade. The upshot of this strategy was a decline in market share, despite increasing unit sales.

Fewer Coupons and Discounts

This dynamic led to changes in management at the company and with those changes came a change in strategy. The new management has decided to transform the brand from a seller of luxury handbags to women to a brand that offers a full catalog of clothes and shoes to men and women, in addition to handbags. However, the company is not giving up on its core business just yet. In the past, Coach had been able to compensate for declining same store sales with gains made through flash-store sales through third party websites. In the previous quarter, the company began a strategic reduction in third-party flash events from three in a week to three in a month. Access and invitations to the factory store flash sales site was also limited. Year-on-year comparisons suffered due to this but the management is willing to accept this as a cost of rehabilitating its brand. [5]

Re-Building Its Core Business

Coach has decided to offer sales on goods in full-price stores for the first time in its history. The goods will go on sale twice a year, with price cuts of 30%-50%. ((Coach to Discount Products at Stores in Break With Tradition, Bloomberg, June 2014)) The new promotional model is intended to arrest the decline in same store sales by luring in value conscious customers through discounts. The company will be hoping that it can win over the loyalty of these customers and persuade them to return to their stores in the future. Whether this strategy is successful or not is hard to predict, given that sales in the fashion industry are often driven by popular trends that are hard to foresee.

Regardless, there are other opportunities that the company has already identified. In the earnings call for Q2 F2014, the company’s management pointed out that average unit prices (AUP) had risen by 7% last year as it added newer product and designs. [6] Moreover, the company expects theĀ  AUP to continue to increase as the first products from Stuart Vevers, who replaced Reed Krakoff as executive creative director last summer, reach stores in September. The trend towards a higher AUP shows that the company has identified an opportunity in the >$400 price point range. Coach’s European competitors, like Louis Vuitton, Hermes and Burberry, do not sell leather bags below $1500 and $2000. There is an opportunity for Coach here to enter with lower prices, but higher perceived value and quality, consistent with its brand name. It is a space that the company’s new creative director, Stuart Vevers, knows well, having previously worked at the European houses of Loewe and Mulberry. In the previous quarter, Coach’s higher priced products exhibited strength as the above $400 price bucket grew in penetration and represented 21% of handbag sales, with products priced $600 and higher performing the best.

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Notes:
  1. Coach to close 70 stores in North America as sales fall, Reuters, June 2014 [] []
  2. Coach 10-K, SEC []
  3. Coach 10-Q, SEC []
  4. Coach, Inc. SEC Filings []
  5. Coach CEO Discusses F3 Q2014 Results, Seeking Alpha, April 2014 []
  6. Coach CEO discusses Q2F2014 Earnings, Seeking Alpha, January 2014 []