For Coach, Profits Are in the Bag

The bottom line on constant innovation and relatively modest price tags: Fourteen quarters of double-digit growth

By Diane Brady

For signs of softening consumer sentiment, don't look to Coach (COH ) -- the New York handbag maker continues to be one of the hottest brands around. On Oct. 25, it announced its 14th straight quarter of double-digit growth in existing retail stores. For the quarter ending Oct. 1, Coach reported 30% growth in sales over last year, to $449 million, and a 48% jump in net profits, to $100 million.

"The wind continues to be at our back," says Coach Chairman and CEO Lew Frankfort, who happily admits that the breakneck speed of growth won't last forever. "We've grown at torrid rates over the last few years," he laughs. "Our plan is to moderate to excellent rates."


  For now, though, even the prospect of steeper gas bills can't keep Coach's customers from clamoring for metallic gold pleated Hobo bags or a coyote fur-lined pocket duffle. The reason: a strategy of constant innovation married with a price tag that's somewhere between mass-market and ultra-deluxe.

For about $200 to $400, on average, customers can get a trendy handbag that's distinctly different from last year's offerings. As Kurt Barnard of Barnard Retail Consulting Group puts it: "They have a reputation of being upscale when, in reality, their prices are quite affordable."

Moreover, the company issues new products every month to satisfy the constant appetite for fresh stuff. Coach, perhaps more than any other accessories brand, has worked to make handbags a category that requires multiple purchases for multiple uses. There are weekend bags, evening bags, wristlets, travel bags, and numerous other cases for everything from iPods to diapers.


  Through using different fabrics and silhouettes, the company encourages its customers to make, on average, three different purchases a year. Among the trends for this fall: fur-lined bags, metallic leather, beaded totes, python stripes, jewel tones, as well as pink-and-ivory chenille fabric.

Coach is also careful to separate fashionistas from its bargain hunters. The company never holds sales in its full-price stores or on the Internet. Instead, it sells last year's accessories or irregular products at discounts of about 25% in factory outlets. Sales in those outlets grew 36% in the last quarter, vs. 14% in full-price stores -- a difference that Frankfort attributes to recent efforts to spruce up merchandise at the factory level.

Overall, the company's future is firmly fixed on growing the full-price stores at a rate of 20 to 25 a year, with the aim of increasing from the current 199 stores to roughly 350. The company's 85 factory stores, in contrast, will only grow by a handful each year, with the goal of reaching just over 100.


  With plans to open four new stores in Japan this fall, as well as four more locations in the U.S., Frankfort is confident that the company will have a great holiday season. "We have built a high level of predictability into our model," he asserts. "No brand looks like our brand, and we have extremely loyal customers."

Of course, growing numbers of competitors are becoming smart about upping the fashion appeal of their accessories, too. For the moment, though, Coach is proving a tough act to mimic.

Brady is a BusinessWeek senior writer in New York

Before it's here, it's on the Bloomberg Terminal.