Why Is Coach Pulling Back From Department Stores?

During its fourth quarter and financial year 2016 (ended June), Coach (NYSE:COH) announced its decision to pull the company’s handbags and leather goods out of 25% of department stores, or by over 250 locations, a move which is specifically designed to move away from the discounting that has hurt its luxury brand image. Furthermore, the company intends to reduce the markdown allowances to the channel, citing a highly promotional environment embraced by such stores. The heavy discounts offered in this channel make it harder for consumers to spend more on a similar bag at the company’s own stores or its e-commerce websites. While the company didn’t specify the names of the wholesale stores, according to the company’s regulatory filings, Macy’s, Nordstrom, and Lord & Taylor are its most significant customers.

See our complete analysis for Coach here

Coach is the latest label to be cracking down on the heavy discounting associated with its brand; others include Ralph Lauren and Michael Kors. The latter generates an estimated 40% of its revenues from such stores, and is also cutting down on the amount of merchandise it sells through the channel. Kate Spade, which is still building out its wholesale network, as it is a much smaller brand, is also taking a careful and cautious approach. Since outlet stores are usually located in tourist locations, they’ve been hit particularly hard, as a strong dollar has hit the tourist inflow into the US.

Coach has its roots in the wholesale business, as it began as a wholesaler to department stores in the 1940s. However, the company no longer receives a bulk of its sales from this channel. According to Bloomberg, the company currently gets less than 5% of its total business from North American department stores, despite having a presence in a thousand locations in the country. In as early as 2004, the company attained over 45% of its sales from wholesale channels. In recent years, the company has concentrated on building out its own retail locations or selling the merchandise through its e-commerce websites.

This trend can be seen in the luxury segment as a whole. Many are pulling back in order to take a stand against the excessive department store promotions. However, for these stores it could not have come at a worse time, as they are all grappling with falling customer traffic and soft sales, besides the increased pressures from e-commerce retailers, such as Amazon, and off-price stores, such as T.J. Maxx.

While this strategic decision negatively impacted the sales of Coach by 150 basis points in the first quarter of 2017 (ended September), it is expected to have significant long term gains. These steps are being taken to elevate the brand positioning, which was reflected in the above-$400 price bracket rising in penetration to over 50% of the handbag sales, up from ~30% last year. This further drove the handbag AURs (Average Unit Retail) to over $300. While these efforts have resulted in a slow growth, an overall growth of 1% for the company, it has resulted in a better bottom line performance and a healthy inventory position. The company was able to reduce the inventory from $575 million in the year ago period, to $547 million at the end of the September quarter, putting it in a better position heading into the holiday selling season.

Besides these steps, the company is also continuing to establish its modem luxury concept globally, renovating and opening 40 such stores in the quarter, including three renovations in the directly operated North American business. In total, the company has renovated and opened nearly 500 such stores globally, across all channels. This is in line with the target to end the year with over 700 doors in the new format, representing a vast majority of the company’s traffic. Moreover, consistent with the plan, the comparable sales in these stores is higher than that in its other stores. The company’s Mystery Shopper Scores, their metric to gauge how Coach delivers its unique modern luxury experience, was up 80% in the first quarter, as compared to 70%, when the company first started tracking it.

Have more questions on Coach? See the links below:

• Coach Continues With Its Positive Momentum In North America
• Can Coach Continue Its Positive Earnings Surprise Streak?
• Is A Coach-Burberry Merger In The Cards?
• Why Has Coach’s Stock Price Risen 30% In One Year?
• What Is Coach’s Plan With Regards To Its Store Footprint?
• Coach Q4 And FY 2016 Earnings: A Return To Growth In North America
• Why Do We Feel Coach Has A 17% Upside Potential?
• How Will Coach Close Out Its Financial Year?
• What Will Be Coach’s Revenue And EBITDA Breakdown In 2016?
• How Will Coach Perform In 2016?
• What Will Be The Impact of Coach’s Collaboration With Disney?
• How Has Coach’s Revenue Per Square Foot Changed Over The Years?
• What Percentage Of Coach’s Stock Price Can Be Attributed To Growth?
• What Has Resulted In A Decline In North American Net Sales And A Rise in International Sales For Coach So Far In FY 2016?
• Coach’s Strong Presence In China To Help The Company In The Future
• How Did the Different Segments Of Coach Perform In Q3 2016?
• How Has The Transformation Plan Affected Coach’s North American Retail Store Count?
• Coach Q3 2016 Earnings And Revenue Beats Expectations
• What To Expect From Coach In Q3 FY 2016?
• Is Coach’s Transformation Plan Working?
• Coach: Year 2015 In Review
• Is The Men’s Segment Becoming Big Business For Coach?
• How Will Coach’s Revenue And EBITDA Change In The Next 3 Years?
• What Is Coach’s Fundamental Value Based On Expected 2016 Results?

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