Coach gallops ahead on premium-to-luxury focus, acts on department store discounts

Coach SS16

Coach SS16

All company results are interesting but some are undeniably more interesting than others. Which is why the premium-to-luxury handbag trio of Michael Kors, Kate Spade and Coach is such a fascinating roller coaster read.

The story so far: Coach really owns premium accessories for much of this century but then falters and brings in Stuart Vevers to give it a style turnaround. Michael Kors take over as top premium brand but over-exposure sees its cool cred slipping away along with its sales growth. Then Kate Spade goes from high-end niche brand to quirky premium handbag giant, stealing market share and becoming the new premium queen. However, lately consumers have been tiring of its quirky cuteness and preferring its more conservative styles.

So is that it? Of course not. The handbag wars roller coaster is always on the move. Michael Kors results are out later today and Coach’s latest news is already in. And the headline? Coach has regained its momentum. It has the resources and the determination to hit back and under the creative lead of Vevers it’s doing just that. Phew.

An injection of fashion cool, revamped stores, a focus on pushing up prices but still keeping them below luxury level, fewer markdowns and one very good acquisition have made it a company on the rise.

Coach said yesterday that its Q4 comp sales rose for the first time in three years at its North American stores. Comps in its core market rose 2% and total sales there rose 9%, while globally, sales rose 15% to $1.15bn. Although that fell short of what analysts had expected, it helped net profit soar to $81.5m from $11.1m in the 13 weeks to July 2.

In a world where lower tourist spending, bargain-hungry domestic consumers and other factors mean non-essentials are having a tough time, that’s pretty impressive.

CEO Victor Luis said Q4’s figures “capped a year where we returned the Coach brand to growth while elevating brand perception.” And brand perception really is key here as consumers need to see premium handbags as not just desirable but aspirational, which is why Michael Kors’ over-exposure has been causing that brand such problems.

Trends, luxury and the department store dilemma

coach board

Coach SS16

Its US domestic market is crucial to Coach as the firm gets more than half its revenue from North America. And just as its higher-price luxury peers did some years ago, the company is benefitting from becoming more focused on its own stores there and from reducing department store distribution.

It’s planning to cut its presence in that channel by around 25% this financial year alone, which means exiting 250 department stores as it seeks to wean its customers away from the discounts those stores can’t seem to work out of their system. And as well as reducing that sell its products, it will cut the money available to fund discounts at the remaining stores. That will almost-certainly hurt Q1 sales but should, Coach hopes, set it up for a world of higher-margin aspirational sales in future.

That aim should be helped by a more intense focus on trended product rather than the classics, as well as a quality boost and revamped stores.

Higher prices should help too, which may seem contradictory given Coach’s longstanding premium positioning and the problems many true luxury brands are facing in trying to convince us that their $1,000, $1,500 or $2,000 bags are worth the money.

But Coach knows that fashion cred really counts and, like Gucci at present, if you have that cool appeal, selling at higher prices is easier, which is why the rebuild Stuart Vevers has been doing to the brand is so important. His new-vision stores and new lines, like the 1941 offer, ooze fashion coolness.

And while prices are rising, Coach isn’t straying too far into luxury territory with bags at a maximum of $800 still being deemed ‘affordable’ by many customers. The wisdom of its strategy is clear from the fact that items costing over $400 accounted for 40% of sales in Q4, compared to 30% a year ago.

Victor Luis said this is all about setting Coach up for a profitable future, as well as giving Coach shoppers consistency – after all, consistency hasn’t been a strong point in the past. Customers could often visit the brand’s own stores and see the products available at a higher price than the markdown prices in department stores.

How all this change will affect Coach’s own outlet stores is unclear. They struggled with flat sales in Q4 and the firm doesn’t expect them to rise this year.

And the outlet stores weren’t the only disappointment in Q4. Also less-than-stellar in Q4 was the online channel where sales only rose 1%, which shows that Coach, like so many other premium or luxury brands, really needs to get its act together online. And let’s not forget those North American department stores where sales dropped in the mid-teens. Coach’s strategy is likely to lead to turbulent times in that channel for some time yet.

Stuart Weitzman

Gigi Hadid for Stuart Weitzman AW16 by Mario Testino

Gigi Hadid for Stuart Weitzman AW16 by Mario Testino

And now for the acquired Stuart Weitzman brand, which is also motoring ahead. The company-within-a-company said yesterday that Giovanni Morelli (ex-Marc Jacobs, Chloé and Burberry) will be its new creative director, succeeding Weitzman himself who becomes the unit’s chairman.

It’s a big responsibility for Morelli given that Weitzman added $46m to profit and $84m to revenue in Q4.

That brand’s footwear focus is a great counterpoint to Coach’s own bags and accessories profile. It will be interesting to see how it develops with its long-time creative chief (and founder) no longer holding the creative brief. But with Morelli being well-respected in the industry and Coach as whole really on a roll at the moment, let’s hope we hear lots of good news.

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