Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Coach Inc. is putting on its big-boy pants. 

Shares in the handbag and accessories maker jumped 12 percent Tuesday after it posted better-than expected earnings. But Coach's long-term strength will depend on how well it executes on increasingly ambitious plans to join the ranks of the world's biggest luxury fashion houses.

Flying Coach
Coach's shares soared Tuesday after it reported better-than-expected earnings
Source: Bloomberg
Intraday times are displayed in ET.

Comments during Coach's earnings call Tuesday -- as well as recent hires and deal chatter around potential luxury targets -- make it clear the company has higher aims than the goal it announced in 2014 of restoring a 76-year-old brand tarnished by years of deep discounting and over-expansion.

Coach has taken some short-term sales losses by pulling out of hundreds of department stores, closing poor-performing stores, and relying less on discounting. But it has gotten customers to pay full price for its goods again, and it has started to rebuild its image as true luxury player. Sales of goods priced higher than $400 made up more than 55 percent of Coach's handbag sales in North America, up from 40 percent a year ago, the company said.

Price Path
Coach has been able to successfully reduce discounting and move its customers toward buying pricier handbags
Source: Coach Inc.

Now, Coach wants to transform itself into a sort of mini-conglomerate, along the lines of European fashion houses such as LVMH Moet Hennessy Louis Vuitton SE and Kering SA. It's a promising idea for Coach shareholders, if it works. 

Bagging Sales
Coach Inc. has posted year-over-year sales growth in the past four quarters
Source: Coach financial statements

Coach declined to comment on specific acquisitions Tuesday but stressed strategic M&A is a top priority. Its 2015 acquisition of luxury shoemaker Stuart Weitzman has paid off, and it's hungry for more. Coach has held talks to acquire Kate Spade & Co. and Jimmy Choo PLC, according to recent reports. Meanwhile, a Coach buyout of Burberry Group PLC, which Gadfly has endorsed, is a perennial favorite among luxury deal rumors.

Whichever companies Coach decides to pursue, the luxury space is ripe for consolidation. And Coach is armed with a cash pile of $1.9 billion, up from $1.3 billion a year ago. It has also pared debt to less than $600 million, from $900 million a year ago, which will come in handy if it decides to do more than one deal this year.

Armed And Ready
Coach Inc. has been preparing for M&A by building up its cash reserves and reducing debt
Source: Bloomberg

Coach has also smartly reconfigured its corporate structure; it recently nabbed former Jimmy Choo PLC chief Joshua Schulman for the newly created role of Coach brand president, and promoted its international head, Ian Bickley, to lead global business development (corporate jargon for M&A).

Transforming into a true fashion house won't happen overnight. And such a change comes with serious risks, particularly in the U.S., where investors long ago stopped believing in conglomerates. Companies have spent recent decades breaking into pieces, under the assumption that executives can't successfully manage multiple brands and that parts are worth more than the whole.

For instance, the company Kate Spade evolved out of, Liz Claiborne Inc., spent decades scooping up labels as varied as Juicy Couture , Mexx, and Lucky Brand, only to have shareholders complain about poor performance. Eventually it got rid of all the other brands, renaming itself Kate Spade.

Most of Liz Claiborne's acquisitions were one-hit wonders, though (remember Juicy Couture sweatsuits?). By contrast, luxury labels such as Celine and Gucci became tried-and-true lifestyle brands after meticulous cultivation by European conglomerates.

In nursing its sick brand back to health, Coach has successfully channeled the patience and focus of those fashion houses across the pond, by taking a slow approach to deals, making smart executive hires and enduring short-term sales hits to set itself up for future gains.

As long as it steers clear of Liz Claiborne's quick-hit deal strategy, splashing cash around to snag quick sales, Coach should be able to build a fashion house to last. 

-- With assistance from Andrea Felsted in London 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net