Coach's Driver Picks Up The Pace

CEO Frankfort's overhaul has doubled revenues and sent the stock up 900%

Lew Frankfort runs a $1.3 billion company, Coach Inc., that is the nation's largest maker and retailer of handbags and one of the fastest-growing luxury brands in the world. He lives in a 100-year-old house in a fashionable New Jersey suburb and has a weekend place in the Hamptons. He just bought a $160,000 Aston Martin. And he doesn't mind letting you know that he's afraid of losing it all.

Without much prompting, Frankfort, 58, will recount a recurring dream that reflects his working-class childhood in the Bronx: In it, his home sits on a tree-covered hill on the edge of a rundown portion of his old haunts. "With one misstep, I would slide and my house would slide right back into the Bronx," he says.

That's the Lew Frankfort whose vulnerability endears him to the employees at Coach's mod loft headquarters on West 34th Street in Manhattan. Hardly a day goes by that he doesn't express his worry that Coach will lose its way, its edge, its status. "He's scared of failure, and he will tell you that," says his son, Sam, a 25-year-old associate at Bear, Stearns & Co. (BSC ) in New York.

As is often the case with successful executives, that fear is a foil to a supersize ambition. Frankfort, who has been chief executive of Coach since 1996, is trying to overturn the glamorous old order, where names like Louis Vuitton, Hermès, Prada, and Gucci have long ruled the $13 billion worldwide market for high-end leather goods and accessories. That's less unlikely than it sounds: Not since Tiffany & Co. (TIF ) helped define extravagance in the 1960s has an American luxury brand had as much cachet globally. Yet Frankfort wants supremacy -- he wants to supplant Vuitton, the largest of them all. And, for now, that does seem a bit of a stretch. The French company's sales surged in the U.S. last year as it boosted advertising.


Still, a decade ago, Frankfort's notion would have seemed downright ludicrous. Coach sold sturdy leather bags that had all the panache of a lawyer's briefcase. In the 1990s, when Gucci Group (GUC ), Vuitton, and Prada all revitalized themselves, Frankfort knew he had to radically update Coach's look, which had gone largely unchanged for years. In 1996 he hired Reed Krakoff, a hip young designer for Tommy Hilfiger Corp. (TOM ) "I told Lew that Reed would become the Tom Ford of Coach," Hilfiger recalls, referring to the star designer who turned Gucci into the darling of the fashionistas.

Krakoff, now 40, enlivened the brand by adding more color, more femininity -- in short, more style. He developed bags using fabric, which of course is cheaper than leather, and helped boost profit margins. He also brightened up Coach's 242 stores and completely rethought its advertising. Sitting on a Coach suede chair in a conference room, Frankfort tells a portfolio manager why there is so much pink in this season's collections: "People still see Coach as a very serious brand, even though they find it feminine and fashionable. We also want to be fun to be with." He and Krakoff like to call Coach a "quintessentially American brand" -- one that is accessible, with prices about half those at Vuitton, but not too accessible.

At the same time, Frankfort has done something even more unusual for a luxury brand: He relies on a rigorous management and financial system. Frankfort is, at heart, a by-the-numbers executive, one who reserves his greatest praise for those who are "numerate." When the company's 30 top executives enter their offices in the morning, they are greeted with a voice mail providing sales figures from the day before. If managers don't know their numbers, Frankfort punishes them with even more exacting questions. "You need to make the numbers dance to stay invited to the party," says Michael Tucci, president of North American stores.

Frankfort says he picks apart numbers because they ground his decisions and "debunk myths." Coach also interviews 10,000 consumers a year about their shopping habits and tests new items at pilot stores. That's how Frankfort discovered that women would pay $328 for an everyday bag called the Hamptons Flap Satchel. The conventional wisdom was that most would resist spending more than $298. But since the satchel was first tested in 2002, it has become one of the company's best-selling items. It's the Procter & Gamble Co. (PG ) approach to fashion. Or, as American designer Joseph Abboud puts it: "Lew has created a wonderful platform so Reed can express his creativity."

In this case, wonderful means that since taking Coach public in a spin-off from Sara Lee Corp. (SLE ) in 2000, Frankfort has more than doubled revenues. Profits in that time have grown at an average annual compounded rate of 55%, driven by operating margins that are the highest of any publicly traded retailer in America, and the stock has risen 900%. For the fiscal year ending in June, analysts estimate net income of $231 million, up 61%. (Frankfort owns 1% of the shares, worth about $73 million.) Coach is set to surpass Gucci as the second-most-popular accessories brand in Japan, the world's largest luxury market. And though Coach's sales are just a fifth of Vuitton's there, they are growing at four times the rate of its rival's.

It's not just Frankfort's reliance on numbers that sets him apart from some of his peers. Frankfort, who tends to wear Ralph Lauren made-to-measure suits, grew up without paying the least bit of attention to the fashion world. The son of a New York City policeman and a stay-at-home mom, he had such a bad speech impediment that he couldn't make himself understood until he was 4. After graduating from Hunter College and Columbia University's business school, he went to an investment bank. But soon he decided he wanted more meaningful work and joined the administration of Mayor John V. Lindsay. Over the next nine years, he rose to become a commissioner overseeing the city's day-care and Headstart programs.

Frankfort returned to the private sector when he was passed over for a promotion under Mayor Edward I. Koch, who recalls Frankfort as a "very good numbers guy." A friend suggested that Frankfort meet with Coach founder Miles Cahn, who hired him to head business development in 1979. Frankfort knew little about women's purses, but that didn't matter. Cahn wanted an outsider who could look at the business with fresh eyes. Frankfort opened Coach's first stores and developed its catalog business. When Cahn sold Coach to Sara Lee six years later, Frankfort became president; in 1996, he was named CEO.

Since then, Frankfort has led the company with the thoroughness of a good city bureaucrat and the passion of an entrepreneur. Even today, he e-mails his family when the stock reaches a new milestone. At weekly meetings, he and his executives review and adjust projections for each business division, all the way down to prices of individual items. The smallest numbers may jump out at him, such as the price of certain key chains to be sold this fall. They are set at $28 to $38, far less than most things Coach sells, and Frankfort wonders if such an item is too pedestrian. "It doesn't add to the aura of Coach," he says, suggesting that the group reconsider including them in the collection.

To remain focused on offering "affordable luxury," Frankfort says he won't be making any distracting acquisitions. He contends that Coach should be able to double sales again in four to five years on its own. But any brand is only one weak collection away from trouble -- all the market research in the world can't always save you from that. And if Krakoff's success earns him a better offer somewhere else, he would be hard to replace. "One of Coach's biggest risks is that it could become a victim of its own success," says Lehman Brothers Inc. (LEH ) analyst Robert S. Drbul.

That, of course, would be Frankfort's worst nightmare. But despite -- or perhaps because of -- his fears of being on the edge, Coach doesn't look as if it's slipping yet.

By Robert Berner in New York

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