Coach turnaround showing excellent progress

Full-year trading figures show the Coach turnaround program is making excellent progress, says GlobalData MD Neil Saunders.

“The US luxury brand has ended its fiscal year with a set of strong results overall. Although sales shrunk in both North America and Europe, this is because this quarter was a week shorter than the same period last year. When this is stripped out, total Coach brand sales rose by 5 per cent, or by 7 per cent on a constant-currency basis.”

Coach CEO Victor Luis said that for the full year, sales in China showed “solid gains”.

For the latest quarter, to June 30, greater China sales increased 3 per cent year-on-year in dollar terms and 7 per cent in constant currency on a 13-week basis, driven by double-digit growth and positive comparable store sales on the mainland, offset, in part, by softness in Hong Kong and Macau.

Japan sales declined 3 per cent in dollars and 1 per cent in constant currency. Sales for the remaining directly operated businesses in Asia decreased mid-single digits in dollars and in constant currency, due primarily to weakness in Korea “where macroeconomic and geopolitical headwinds continued to pressure spending from domestic consumers and tourists”.

Luis hails strong fourth quarter group-wide results, with mid-single digit North American comparable-store sales for the Coach brand and solid growth at Stuart Weitzman – capped an excellent 2017 performance.

“For the year, we posted a double-digit increase in net income as we continued to make progress on our brand and company transformation plan. We generated positive Coach brand North American comps in each quarter, while driving solid international Coach brand sales gains, notably in Europe and Mainland China.

“Importantly, the Coach brand evolved across the key consumer pillars of product, stores and marketing, with strategic actions including a broader 1941 collection, dual gender runway shows, the execution of a differentiated store concept and new collaborations and campaigns further elevating brand perception,” Luis says.

Saunders adds that within North America, reported sales were down just over 3 per cent; taking into account the shorter quarter, sales rose by 4 per cent, while direct to consumer sales were up by 5 per cent.

“These are the strongest revenue figures of the fiscal and were especially positive given Coach was up against a high comparative from the prior year when North American sales rose by 9 per cent.”

The North American figures also come against a backdrop in which Coach continues to pull back from department stores, where brand sales were down 40 per cent on a point-of-sale basis, or 20 per cent in net sales terms.

“The company is now lapping the anniversary of when it first started to dial back its involvement with department stores, and we are encouraged that the impact has been positive for the brand, helpful to profit, and ultimately beneficial for sales.

“The decision to reduce reliance on department stores, while an obvious move, is justified by the increasing gap between their selling environments and those in Coach’s own stores. Over the past half year, Coach has put considerable effort into store displays and collections and these now look very compelling and engaging. We believe that window displays and the general selling environment have been elevated a long way from the rather clinical atmosphere of older Coach stores, and are now more inspirational and engaging. In contrast, most department stores continue to go downhill rapidly and are becoming increasingly unsuited to selling premium products.”

Coach turnaround “almost complete”

Saunders believes the Coach turnaround program is now almost complete. “The label is now back to a position of strength and is held in high regard by consumers. This is a marked turnaround from where it was a couple of years ago when constant discounting and oversaturation had eroded much of the brand’s equity and had reduced the premium shoppers were willing to pay. Our data shows Coach has rebuilt its favorable image with consumers and is increasing its market share in the premium handbags and accessories segment of the market. Admittedly, the brand has more work to do to maintain this momentum, but it is clearly on the right track.”

Saunders says the acquisition of Kate Spade gives the company a new growth vector in fiscal 2018.

“Over the course of the year, this along with the organic growth at existing businesses should add $1.2 billion to the topline. Profits, at least at operating level, will be aided by the $30-35 million of synergy savings from the integration. However, it is also clear that there will be some short-term pressure as Coach pulls Kate Spade back from wholesale and its exposure to unfavorable channels, as well as reduces the number of flash sales with which the brand is involved.

“In essence, Coach is hoping to rebuild the Kate Spade brand in the way it has done with its own label. If it succeeds – and we believe it will – it will emerge as a significant luxury player and one that, ultimately, will probably be keen to make further acquisitions.”

Consumer perceptions have improved

Meanwhile, Luis says the ambitious plan laid out three years ago to transform the Coach brand has worked. The company’s goal was to increase relevancy and improve consumer perceptions.

“During this time, we’ve done just that, by making the necessary and significant investments across all aspects of the Coach brand and business. We are extremely pleased with the progress we’ve made, having largely attained our strategic goals, in spite of the impact of the volatile retail and macroeconomic environment on our core category.

“Today, after the successful integration of Stuart Weitzman and the acquisition of Kate Spade, we are at an exciting and pivotal moment in our journey. In an unpredictable environment, we are evolving to drive our long-term success by reinventing ourselves, moving from a single-brand, specialty retailer, to a true house of emotional, desirable brands built on our unique values.

“We are transforming into an entirely different, truly multi-brand company, creating a more agile organisation and infrastructure to support a new corporate structure, while making certain each brand has the resources in place to innovate and drive its distinct personality.”

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