Four Things Coach Must Do To Turnaround Its Fortune

Given the overwhelming dependence of Coach‘s (NYSE:COH) business on its operations in North America, the significant decline in North American sales over the past two years has been enough to offset the gains made by Coach in its men’s, footwear, and some international geographies. North America contributes around two-thirds of Coach’s sales, and the company has been losing market share to competitors like Michael Kors, Kate Spade, and Tory Burch over consecutive quarters. As a result, over the past few quarters, Coach has changed its approach to products, stores, and marketing. The company is moving from its core competency of women’s handbags to becoming a dual-gender lifestyle brand. Additionally, Coach has decided to leverage its brand name and expand into footwear, accessories, apparel, jewelry, and eye wear categories.

However, the success of the company’s brand transformation strategy is still moot. Below, we list four measures by which it is possible to evaluate the extent to which the luxury accessories and footwear manufacturer and distributor has been able to turnaround its brand image.

1) North American Comp Sales Must Improve: Coach’s North American comparable store sales have fallen by around 20% for six consecutive quarters. However, this trend should reverse after fiscal 2015’s projected weakness on the back of under-performing store closures and sales growth resulting from remodeled and renovated stores. Coach has closed 53 stores to date and the figure is expected to increase to 70. ^[1] The company also opened twenty new concept stores, which outperformed the rest of its fleet. Additionally, the company closed 8 outlet stores and has reduced online flash sales from three per week to one per week. The figure is expected to drop to about two per month by the end of the fiscal year. North America contributes nearly two-thirds of the company’s overall revenue and this is not expected to change anytime soon. For the company to have a successful turnaround, its performance in the region must improve.

2) SG&A Expenses Must Fall: Selling, General, and Administrative Expenses are expected to increase from around 44% of revenues in fiscal 2014 to around 52% of revenues in fiscal 2015. ^[2] In fiscal 2015, the company is expected to incur expenditures due to the termination of the leases of under-performing stores and renovations and remodeling of remaining stores. Additionally, the luxury company will also record expenses related to the acquisition and integration of Stuart Weitzman in 2015. This figure must start coming down in the future and drop to the historical average level of around 41% by 2017.

3) Store Count and Square Footage Needs To Be Brought Under Control: In the past, Coach has pursued a contradictory strategy. On the one hand, the company tried to promote a luxury image through its outlet stores, but undercut the same by relying excessively on discounts, flash sales, and sales from outlet or factory stores. This has greatly impacted the perception of the company’s brand value. The reduction of eOS (electronic outlet store) flash sales from three per week to only two a month is a step towards restricting the supply of its products, a precondition for any luxury company. Coach has also adopted the industry standard semi-annual sale model. However, the company’s attempts at brand transformation and revitalization might require it to scale back on its store count and average store square footage. Ideally, the company should reduce its store count to under 200 and cut its average square footage by around 25%. It may also be a good idea to reduce the average time a product is available in its stores in order to create the perception that its products are only available for short periods.

4) Stuart Weitzman Integration: When the acquisition of shoe maker Stuart Weitzman is closed in the spring of 2015, the company will shift its focus towards the integration of the brand into its operations. Currently, Stuart Weitzman has less than fifty stores in the United States, which is only about 5% of Coach’s total store presence. The company makes around $300 million in annual sales and the figure has been growing at a rate of around 15% for the past three years. It will be important for Coach to increase the sales of Stuart Weitzman’s shoes through advertisements and cross-selling as well by exposing its products to a much wider audience by putting its products in the company’s stores. Additionally, the company will also bring the whole Stuart Weitzman team on board and it is difficult to put a value on the talent that the company will also end up acquiring.

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1. Coach’s (COH) CEO Victor Luis on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, January 2015 [↩]
2. Coach 10-K, SEC [↩]