Coach Sniffs Opportunity in Estee Lauder Fragrance Deal

Coach (COH), already a presence in the accessory aisles of most major department stores, is now moving into another part of the ground floor: the makeup counters.

The leather goods and apparel company announced a deal in which Estee Lauder Cos. (EL) will sell its Coach Beauty line of fragrances in department stores. The venture will begin with the U.S. launch this month of Coach Signature fragrance in department stores and specialty retailers, including Macy's (M) Bloomingdales and Macy's itself, Nordstrom (JWN), Dillard's (DDS) and Sephora, followed by a launch in international markets.

"We have a great opportunity to build upon the success we've seen with Coach Beauty by expanding our distribution here in the U.S. and around the world," said Veronique Gabai-Pinsky, Estee Lauder's global brand president. Estee Lauder produces the Coach fragrance under a licensing deal with the apparel company.

Coach launched the fragrance and makeup collection in its own stores in 2007. In a statement, Kathy Nedorostek, president of U.S. wholesale and global licensing for Coach, said the company was "pleased with the customer reactions and industry reception" to the fragrance business and felt the success in its own stores warranted expanding the distribution globally.

Fragrance Seen as Lower-Priced Indulgence for Luxury Shoppers

Fragrance and makeup are natural expansions for a luxury brand, especially during economic downturns. As conventional wisdom goes, the woman who can't spring for a $500 designer bag may trade down to the same designer's perfume or lipstick as a lower-priced indulgence. Even as the market for luxury goods recovers, retailers are still seeing that "aspirational" middle class shopper hold back, so those cheaper treats can help keep a brand's hold on its target customer until the economy recovers fully.

Coach has diversified to weather the recession by adding lower-priced lines such as its Poppy collection, which has prices about 20% lower on average than other Coach lines, and including more accessories and small leather goods to cater to price-bound shoppers.

The strategy has worked in recent quarters. Coach was one of the luxury-goods companies that signaled a bounce back in the sector at the beginning of 2010 when it reported its fiscal quarter earnings had beat expectations. The company posted net income of $241 million, or 75 cents per share, up 11% from the same period in 2008 and ahead of analysts' expectations of 72 cents per share.