Aspirational Luxury No Longer in the Bag for Coach


Coach has undergone several transformations since it was spun off from Sara Lee in 2000. Long-term CEO Lew Frankfort managed to take a style-free handbag company from $19 million in revenue in the 1980's to a luxury brand lifestyle leader making over $5 billion in revenue in 2013.

Coach knows bags

Women's handbags is still the largest part of Coach's business:

(All chart calculations courtesy of personal proprietary Excel spreadsheets, with raw numbers taken directly from company SEC filings)

It takes vision and intuition, along with unflagging discipline, to keep a consumer company relevant and its products on everyone's must-have lists. Lew Frankfort had all of these, and he will retire in January 2014 to be executive chairman, turning the CEO-ship over to Victor Luis, current COO and president.

Coach under Frankfort has been masterful at innovation and change, keeping it at the forefront of affordable luxury and ahead of competitors. With both the CEO and the Reed Krakoff, the creative designer, leaving their positions, Coach's future as a leader in aspirational brands is uncertain. With the business struggling to stay at the top of the market, change in leadership may be coming at an inopportune time.

A forgettable year
Coach shares fell 16.4% after a disappointing second quarter (which includes Christmas), and while the shares have moved up from the 52-week low it hit in February, the recent quarter and year-end in June show Coach is still struggling. Fourth quarter revenue growth was mid-single digits and same store sales (comps) were in negative territory with margin contraction.

Coach is losing position at the top of the affordable luxury sector to several younger, trendier brands --some privately held and others public. International sales grew, but North America proved "challenging"—a euphemism for the declining revenue and negative comps.

Coach growth lags in the US as competitors ramp up new store openings and expand square footage. Michael Kors alone is planning to open 50 retail stores in North America in 2014, and has had a spectacular 2013 and Q1 FY 2014. It's also in the aspirational luxury market, and is taking the sector by storm. While Coach's business in North America and Japan is stalling, Michael Kors continues to see double-digit growth. Both companies compete across the same aspirational/affordable luxury products that include handbags, shoes, watches, jewelry, and clothes. Clothing is the smallest segment for both.

For the 12 months ended June 2013, Coach's North American revenue increased only 2.8% on 0.3% comps. Japan's net sales were down 9% in dollars and flat year-over year in constant currency. Japan had a net increase of 11 retail stores and 9% growth in square footage, and yet revenue was flat, indicating Japan's same store sales are in negative territory and new stores are seriously under-performing. At 15% of total sales, Coach can't afford to let the business slide much further.

The Far East accounts for 19.3% of Coach's total revenue and provides their best growth. There are 126 stores in China alone out of the 218 in the rest of Asia, making it Coach's largest Asian segment outside of Japan (191 stores). That's why, with North American and Japan stagnating and slipping, China is the important growth story.

Cracking China
With revenue growth in China far in excess of the other segments, aggressive expansion is warranted. Coach is a highly visible and recognizable brand name, and they are in the early stages of cracking the Chinese market, so they need to move while they are at the top.

China's performance has reinvigorated the brand internationally. With revenue growth far in excess of store growth in 2013, comps were probably around 20%. Expansion into China is in the early stages, and Coach already has high brand-name recognition that it can capitalize on in the leather goods space. Domestic social media is one of the most powerful tools for marketing in China, moving the needle for aspirational sales -- Coach consistently ranks as one of the most recognized names in luxury products, as evidenced by polling strong numbers.

Coach is as solid as its bags, and with China keeping growth alive, if Victor Luis can manage to reignite the North American and Japanese markets, Coach could give Michael Kors some competition.

The article Aspirational Luxury No Longer in the Bag for Coach originally appeared on

jean graham has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.