Coach Rookie Mistake Erodes Luxury Cachet as Sales Slide

Coach Inc. investors cheered yesterday when the bag maker’s profit beat estimates. Their exuberance may be short-lived.

Sales fell 7.1 percent last quarter, the fourth decline in a row. The 73-year-old company is still recovering from a rookie mistake -- opening outlets all over the U.S. and filling them with cheaper CC logo bags. Goodbye cachet and pricing power.

The Coach story “is a pretty classic case of brand mismanagement,” said Steven Dennis, founder of SageBerry Consulting LLC, in Dallas. “They allowed themselves to lose focus. They made a lot of mistakes in the business. They have tarnished the brand.”

Sales of men’s goods and rising demand in China helped counter slumping sales of women’s bags and accessories in North America this past quarter. Earnings excluding restructuring costs were 59 cents a share in the period ended June 28, Coach said in a statement, topping the 53-cent average of predictions compiled by Bloomberg. The shares dropped 2 percent to $35.10 at the close in New York today after gaining 4.3 percent yesterday. They have lost more than a third of their value this year.

Coach’s results contrasted sharply with those of Michael Kors Holdings Inc., which earlier this week handed in yet another quarter of double-digit sales growth, showing American women still have plenty of appetite for pricey leather bags. In another sign of trouble for Coach, gross margin, or earnings left after subtracting the cost of goods, shrank to 69.4 percent from 73 percent a year earlier. That’s bigger than the 50 basis point margin decline projected by Kors.

‘Challenging Year’

“The fourth quarter capped a challenging year for the company, most notably in the North America women’s bag and accessories business,” Chief Executive Officer Victor Luis said in a conference call with analysts. He pointed to some bright spots, including surpassing $500 million in sales in China and bringing in a new creative director.

Andrea Resnick, a Coach spokeswoman, declined to comment.

In recent months, mea culpas have flowed from Coach’s New York headquarters. In June, executives itemized their mistakes for industry analysts. They’d failed to develop stylish, new products and under-invested in fashion-oriented marketing and full-price stores. They’d discounted too often. They hadn’t responded effectively to a popular new rival -- also known as Michael Kors.

A year ago, it was already clear Coach was losing share and growing more slowly than the market. Two years before that, Coach had been growing twice as fast. Once-loyal customers were seeing too many logo bags on the street that less affluent outlet shoppers were getting for less than they paid for their own bags.

‘In Trouble’

“When the general sense is that the price you are asking for your product is not the real price, then you are in trouble if you are a premium house,” said Mark Cohen, a professor at Columbia University’s business school in New York.

To revive Coach, Luis plans to close 70 stores, a fifth of the North American total, and open or remodel full-price stores in the 12 biggest markets. He will reduce the frequency of discounts and cut 150 jobs. “Accessible luxury” is making way for more sophisticated, pricier “modern luxury.”

Coach is also attempting a difficult transition into a so-called lifestyle brand selling everything from shoes to outerwear. Analysts are skeptical because there’s no namesake founder -- a Kate Spade -- to build said brand around.

To be clear, Coach remains a formidable company that has come a long way from its 1941 founding in a Manhattan loft. Coach still commands about 23 percent -- the largest share -- of the $12 billion U.S. handbag market. From the end of 2008 through 2013, the shares nearly tripled.

Classic Bags

Much of the credit goes to Lew Frankfort, 68, who built a brand with classic $300 bags that were an alternative to the much more expensive line-up at Prada and Louis Vuitton. However, Coach’s missteps happened on Frankfort’s watch, and this year he stepped aside as CEO to become part-time chairman.

To regain its luster, Coach will have to win over shoppers like Kerry Farrell. A 27-year-old New Yorker who markets beauty products, Farrell ditched all of her Coach bags from college days and replaced them with Michael Kors products.

“People like myself, who are into fashion and beauty and accessories, tend to like the runway designers,” she said.

Of course, fashion is a notoriously cyclical affair. Coach executives point out that they turned around the business in the late 1990s after failing to innovate amid intensifying competition, so they can do it again.

“This is a Darwinian process,” said Cohen. “Many of these quality designer brands tend to follow this path. Will Michael Kors trace the same path? It may very well.”

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