Cutback On Discounts Results In Bottom Line Improvement For Coach Inc.

by Trefis Team
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Coach (NYSE:COH) delivered its third quarter sales on May 1, reporting earnings of 46 cents per share on sales of $995 million. Analysts, on the other hand, had expected an EPS of 44 cents and sales of $1.02 billion. The decision to “elevate the Coach brand’s positioning in the North American wholesale channel” resulted in the revenue miss, according to the company. Coach’s strategy, of limiting the promotions on its products, and to pull the company’s handbags and leather goods out of 25% of department stores, or by over 250 locations, is finally reflecting in the bottom line, and has resulted in gross margin expansion in each segment in the quarter. Moreover, encouraged by the improved performance, and the possibility of additional growth through acquisitions, the stock price of the company shot up over 11%, making it the biggest gainer in the S&P 500 on Tuesday.

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Brand Transformation And Elevation

Coach has been working hard to transform its brand in recent years, in the wake of market share loss to Michael Kors and other rivals, who also employed Coach’s strategy of selling luxury products at affordable prices. The company hired a new designer, Stuart Vevers, who introduced higher end products, and undertook to remodel the stores. The retailer has also recruited Selena Gomez to be their new face, in order to appeal to the younger shoppers.

COH Q3 2017 Segment Info

Coach is also continuing to establish its modern luxury concept globally, renovating and opening 50 locations in the second quarter, including 17 in the directly operated North American business, taking the total up to 600 globally. This is in line with the retailer’s target to end the year with over 700 stores in the new format, representing a vast majority of the traffic the company receives. This will also be a boost to the earnings, as the comps in such stores exceed those in the balance of the fleet. The mystery shopper scores, a key metric used to assess how well the company delivers its unique modern luxury experience, were up in the quarter at over 85%, compared to 75% in last year’s third quarter. All these steps undertaken, together with the department store pullback, explained below, have helped to drive brand elevation. This is reflected in the penetration of the above-$400 price bracket products, which increased to 55% of the handbag sales, a massive rise from the 40% seen last year.

Coach has also launched a number of services such as monogramming, leather conditioning, emoji stamps, and a customizable bag program. Across its global fleet, 28 Craftsmanship Bars were installed by the end of the third quarter, with another 7 to be added by the end of the fiscal year.

Department Store Pullback

Coach’s decision to pull the company’s handbags and leather goods out of 25% of department stores has also been a positive step, as the heavy discounting in this channel 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 makes it harder for consumers to spend more on a similar bag at the company’s own stores or its e-commerce websites. In the fall, the company closed the first group of these locations, approximately 120, with the number of days on sale in department stores reduced by 40%. About 140 such stores were shut down in the third quarter, with the remaining handful set to be closed in the last quarter of the financial year. While this strategic decision negatively impacted sales by 150 basis points in the third quarter of 2017, it is expected to have significant long term gains.

COH FY 2017 Guidance

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 instead concentrated on building out its own retail locations or selling the merchandise through its e-commerce websites.

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