Less Bad Is Good Enough for Coach
Sometimes less bad is just good enough to do the trick.
For any other retailer, a 7 percent year-over-year decline in profit and a 4 percent drop in U.S. same-store sales would be nothing to cheer. But for Coach, the results released Tuesday were a good enough indication that the beleaguered handbag retailer is finally starting to win back its customers. The stock rose by as much as 12 percent, its biggest gain since 2010.
Turnaround plans are certainly en vogue in a retail sector battered by anemic mall traffic and changing shopping habits. Coach has been hawking its "transformation plan" ever since CEO Victor Luis took over from longtime CEO Lew Frankfort in February 2013.
In that time, shares of Coach have dropped by almost 40 percent as the company struggled to wean itself off of mega-promotions and an over-dependence on outlet stores that catered to the masses instead of embracing its heritage as a luxury shop serving fashionable customers quality leather goods. It's also been fighting an onslaught of competition from Michael Kors and Kate Spade, which enjoyed years of share gains at Coach's expense.
The about face in Coach's stock on Tuesday raises the question: Is the company's turnaround plan finally taking hold, or is it just wishful thinking on behalf of investors who are now just satisfied with good enough? Is Coach merely lapping poor results with easy comparisons or is the company retaking its lost market share?
There's almost nothing more difficult in corporate strategy than re-establishing a luxury brand after going downmarket. Luxury customers don't want to shell out for higher prices if they know the masses can buy cheaper versions at outlet centers. And scaling back promotions from a discount-dependent shopper is near impossible -- just look at the near-fatal experience at J.C. Penney.
But despite the very long slog toward sales growth, Coach appears to have stopped the bleeding. It's revamping stores and emphasizing higher-quality products and leather goods, instead of the logo-emblazoned bags that have fallen out of favor. Its $400-plus handbags now represent 35 percent of handbag sales, up from 30 percent the year before, and it's cut down on the number of sales events it holds per year. If the company lives up to its forecasts, it will post positive quarterly same-store sales in the U.S. by the end of the year for the first time since the new management took over.
Coach's decision to buy Stuart Weitzman last year has certainly paid off, helping it get back into the good graces of luxury customers who kept on buying boots this winter in spite of the warmer-than-usual weather that hurt other retailers.
Executives remain focused on integrating the shoemaker into the larger company, but said Coach will keep its eyes peeled for other acquisitions that could help drive revenue and attract high-end shoppers. The company didn't mention names, but based on current market conditions, Coach could even buy rival Michael Kors. With any mix of cash and stock, Coach could pay a 25 percent premium to Michael Kors' closing price Monday and the deal be accretive to its earnings even before factoring in any cost savings, according to data compiled by Bloomberg.
Michael Kors and Coach actually don't overlap as much as you would think. Piper Jaffray estimates that nearly half of Michael Kors' sales come from U.S. department stores; for Coach, it's less than 5 percent.
Although the spike Tuesday has brought Coach's stock more in line with its peers, it still presents a bargain for investors: The shares are trading at about 17 times estimated earnings over the next 12 months, compared to a multiple of about 20 for Kate Spade.
Coach still has a long way to go before it can claim success. But if the handbag and accessories maker can just keep giving customers what they want -- differentiating themselves with premium products at the right prices, attracting younger consumers with quality leather goods at lower price points, and inviting its customers back into its newly-renovated stores -- it could just go from good enough to great.
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