By Dow Jones Business News,
January 22, 2014, 03:29:00 PM EDT
By Suzanne Kapner and Everdeen Mason
Coach Inc.'s profit and sales fell over the holidays, and Wall Street is concerned the retailer's plan to improve
its performance by going upmarket may not work out.
The seller of handbags and accessories said earnings for the three months ended Dec. 28 dropped 16% to $297
million, as its revenue slid 5.6% to $1.42 billion.
Weak North American sales, which exclude newly opened or closed stores, fell 13.6% in the period, masking strength
in the company's men's and footwear lines as well as its emerging Asian and European markets. Coach shares, which
declined Wednesday, have lost 13% of their value so far in the new year.
"We continued to be disappointed by our performance in North America, which was impacted by substantially lower
traffic in our stores and by our decision to limit access to our e-factory flash sales site," said Chief Executive
Victor Luis, who succeeded Lew Frankfort this month as planned.
Coach is trying to burnish its brand by adding higher-end products, including more handbags priced over $400, as it
tries to better compete with rivals such as Michael Kors Holdings Ltd., Fifth & Pacific Cos.'s Kate Spade brand and Tory
The company said average prices rose 7% last year as it added more exotic materials and new designs, and it expects
a continued increase this year as the first products from Stuart Vevers, who replaced Reed Krakoff as executive creative
director last summer, hit stores in September.
Analysts worried that in pushing prices higher Coach was allowing itself to be undercut by Michael Kors, who has
taken market share by creating must-have bags like the Selma Messenger that are mostly priced in the $200 to $300 range.
By contrast, Coach's popular Borough Bag starts at $378 and goes up to $1,000.
On the conference call to discuss fiscal second-quarter earnings, executives said Coach had an opportunity to slip
in below European luxury brands, which rarely sell bags for less than $1,500. It is a space that Mr. Vevers knows well,
having worked at the European houses of Loewe and Mulberry.
Analysts also voiced concern over Coach's continued expansion of factory stores, which can dilute a brand's appeal
and make it more difficult to sell items at full price. Coach plans to open 15 factory stores in North America this
year, while it closes 15 to 20 full-line stores and expands 20 other locations.
Paul Lejuez of Wells Fargo Securities estimates factory stores account for two-thirds of Coach's U.S. retail
business, up from 40% a decade ago. "We believe it is the key to many of COH's current challenges," Mr. Lejuez wrote in
a note to clients last year, referring to Coach by its stock ticker COH.
On the conference call, Kimberly Greenberger of Morgan Stanley asked Mr. Luis to explain how he planned to focus on
the dual and somewhat opposing goals of trying to restore brand equity while continuing to expand the factory channel. "
It would seem in some ways that those two things work against one another," she said.
Mr. Luis responded by saying that Coach is continuing to upgrade its full-priced stores, as evidenced by its newly
renovated location on Fifth Avenue in Manhattan.
In the most recent period, Coach's sales in North America fell 9% to $983 million. International sales, excluding
currency impacts, rose 11% to $425 million, including 25% growth in China. Factoring currency moves, international sales
edged up 2%.
Coach said it saw less foot traffic in its mall-based retail stores, in line with broader industry trends. The
company said that normally it might have been able to make up for the shortfall with its Internet business. But it
deliberately reduced access to its flash sales to weed out third-party sellers, which hurt sales.
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