Is Coach winning the handbag wars?

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Coach advertising AW15

Sighs of relief all round on Tuesday at Coach Inc as it gears up for its 75th anniversary year. The American handbag maker finally managed to push its revenue upwards in Q2. It was the first time in 10 quarters (yes two-and-a-half-years) that it had achieved this feat and its shares soared as a result.

Sales in the all-important trading period to December 26 rose 4% to $1.273bn, or 7% currency-neutral, although the total figure was less than analysts had expected. OK, it wasn’t exactly back-slapping all round as there’s still plenty of work to do. The proof? Net income fell 7.3% to $170.1m, while operating income fell to $261m from $275m and the operating margin dipped to 20.5% versus 22.6%.

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Coach advertising AW15

Winner to loser… and back again?

Given that it’s not so many years since I always used to start a Coach results news story with the word “unstoppable”, its recent struggles have been something of a comedown. That’s especially been the case as rivals like Michael Kors came from almost out of nowhere and soared past the brand that once dominated the ‘affordable luxury’ handbag sector.

But even despite the fact that Coach isn’t fully out of the woods yet, it’s clear that its turnaround is achieving results. So what’s finally gone right? I’d like to say it was the Stuart Vevers effect as I love the work Coach’s creative director has done at the brand. But as always with a turnaround such as this, there’s more to it than just the impact of a high-profile designer.

In fact, acquisition activity has been key. Strong sales ($94m worth of them) at Coach’s acquired Stuart Weitzman brand helped a lot in Q2 with boots selling well even though the weather was mild.

Gisele Bundchen stars in Stuart Weitzman's fall campaign.

Stuart Weitzman advertising starring Gisele AW15

Stuart Vevers, China and global appeal

Meanwhile at the Coach brand itself, the Vevers effect has been a positive one with product, store and marketing improvements, even though overall Coach brand sales fell 3% to $1.18bn, or 1% currency-neutral in Q2.

Vevers’ impact on the brand, as well as Coach’s wider transformation plan, is certainly helping it abroad and China is key. That giant market accounts for almost 15% of total sales and CEO Victor Luis said the country is the major growth opportunity for the company outside of its North American home market. In fact, even in the US, Coach is selling lots of product to Chinese tourists despite the strength of the US dollar.

While total Chinese sales only rose 2% in the quarter, if you factor-out problem markets Hong Kong and Macau, they rose in double-digits.

Coach also managed to rise in Europe and Japan with total international sales up 4% to $437m, or an impressive 9% currency-neutral. While North American sales fell 7% to $731m and same-store sales fell 4%, the company said it’s improving and is expecting a rise by Q4.

So the Q2 picture may have been a mixed one but it’s no surprise that the company’s shares rose on Tuesday after the results announcement. Analysts have been more bullish on Coach lately and only this week analysts at Stifel gave it a more upbeat rating than rival Michael Kors.

But Kors has promised a slew of new products this year so the handbag war isn’t over just yet. 2016 will definitely be an interesting year…

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Coach advertising AW15

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