Hindsight is Always 20/20
In April 2011, I read my New Yorker cringing at Reed Krakoff’s comment on his design process at Coach:
“I bang it out,’ he said.‘I know what came before, I know what’s coming next, I know how it will work in the context of the store and the ads. It’s like a code.’…Krakoff picked up a bag from the table, a lilac nylon tote, with silver-studded black patent-leather handles a female face silk-screened on the front. ‘This fills the arty, limited kind of hole,’ he said. ‘I may cancel this bag. But it doesn’t matter. Then I just need something else to fill that hole.’”
Ouch! Such hubris from the executive creative director of the then-$4 billion global accessories brand, and in retrospect an indication that Reed’s attention was really on his eponymous line introduced in 2010. Ariel Levy’s article, Brand-New Bag, oozes Reed’s aesthetic contempt for the women who made him successful. Well, on Friday September 6th, Reed, along with a group of investors, bought the Reed Krakoff brand from Coach finalizing the separation (though Coach has a minority share in Reed Krakoff); a new chapter has already begun at Coach.
Out With the Old And In With the New
FY 2014 (ending June 30, 2014) is a transformational year for Coach. The company is in the early innings of transitioning itself into a lifestyle brand and heightening the emotional connection the Coach brand has with consumers as it introduces a sprinkling of iconic fashion pieces to its assortments. There’s shuffling among the executive and design teams as well. In addition to Reed’s departure and the arrival of his replacement, Stuart Vevers from the Spanish luxury design house of Loewe (and whose pedigree includes stints at Mulberry as Creative Director 2005 to 2008, as well as Louis Vuitton, Bottega Veneta, Givenchy and Calvin Klein), and a new head of NA Retail, Fran Della Badia, takes the reins from Mike Tucci. Many long-time Coach executives are taking on expanded roles. Lots of changes. All good!
It may take awhile for investors to agree, but a year from now, look for Coach to post positive same-store sales gains in the US, while benefiting from international expansion in Asia and Europe, growing its men’s and footwear businesses and connecting on an emotional level with global handbag collectors (women who buy bags they don’t need but totally love their ‘must have’ purchases). For now, CEO Lew Frankfort is reluctant to commit to positive store traffic and comp trends until they materialize, and sees the lifestyle positioning as a multi-year journey. COH shares are trading at a 36% discount to peers at 14X forward EPS estimate of $3.85 (vs. 22X). Modest multiple expansion in tandem with traction in Coach’s strategic initiatives to 16X multiple) results in a share price range of $62 to $65, a gain of 16% to 21%, exclusive of the 2.5% dividend yield. Sounds reasonable.
At a recent showroom tour with Fran, she pointed out the covetable handbags, footwear, fashion jewelry, and outerwear that arrive in Coach full-price stores in time for Holiday 2013 and into early 2014. The assortments are a return to quality leathers with minimal hardware (a whole lot less bling), a real palette cleanser, and the perfect accessory for a season where print is the new color (to quote Fran’s informed fashion sense). The shoes, a licensed business manufactured by Jimlar (which also manufactures Frye footwear) are in a whole new design league with references to French footwear giants, Louis Vuitton and Roger Vivier. With time, the design influence of Sandra Hill (arrived at Coach in January 2013 after 14 years at Paul Smith, ultimately as Creative/Design Director Womenswear) will have greater impact on assortments, along with Stuart’s influence.
Limited Distribution Capsule Designed for Emotive WOW!
I saw Capsule product too. A stretch leather skirt at $900 and a sheared rabbit vest at $1200 aimed at resetting brand sophistication will be available for sale in 11 NA flagship stores and 20 global flagships. For holiday shopping, Capsule footwear will have broader distribution in about 75 NA flagships at $300; and new Capsule handbag, Boroughs, will be available in all stores with limited (five) SKUs; and 40 flagships will have deeper inventory. Bags range from $300 to $1200.
Not to worry that Capsule and lifestyle marketing is Coach’s entry into the apparel business. Lifestyle means a head-to-toe expression of the brand with the intent of increasing brand excitement and their customers’ emotional engagement with Coach. According to Coach’s consumer research, what the consumer sees when she thinks of Coach is a free-floating handbag (like many of the ads); a single product suspended in the air. Excluding outerwear, which Coach has been offering for years with a few jackets/coats/limited edition pieces, the lifestyle component consists of 12 looks with 48 SKUs and will be limited to 20 stores out of the 940 fleet, as well as some Internet sales and use of the apparel in store windows. In sum, lifestyle product will be a rounding error in the discrete financial sense, and more broadly, a marketing and branding strategy. That said, I really want that leather skirt!
Fiscal 2013 Financial Wrap-up
Coach ended FY 2013 with mixed results; men’s and international businesses enjoyed strong momentum, capturing market share and driving growth. But the backbone of Coach, its 30% share of the North American handbag and accessories market driven by its strong outlet business, ended on a weak note with retail comps off 1.7% in the final quarter as the product/brand got too functional and lost the romance/desire a luxury brand requires. It’s worth noting that the very features that supported Coach’s success–function and durability–won’t support continued growth. Going forward, new categories and geographic expansion will drive growth while marketing and brand positioning should stem domestic market share loss. In FY2013, Coach China sales rose 40% to $430 million and Coach Men’s grew 50% to $600 million. FY 2013 sales rose 7% to $5.1 billion. Footwear, a fragmented market amounting to $20 billion globally is a huge opportunity for Coach. It was re-launched in the spring in 170 full price stores with the intent of elevating product, supporting lifestyle branding and reinforcing fashion credibility and where it re-launched, in addition to driving store traffic, footwear sales rose to 12% of store business, up from 7% in the year ago quarter.
Outlets Provide the Bulk of Coach Handbag Marketshare
Coach doesn’t report sales by retail channel, though according to the 10-K filed August 22, 2013, in North America Coach has 351 full price stores to its 191 factory stores. Square footage is more telling at 952K fullprice and 982K factory, with the latter expanding 192K square feet (24%) in the past 12 months while the full price footprint is down modestly (7K square feet). While the focus of outlet expansion was new men’s stores and selected expansions, a 24% increment is expansive and could undermine brand positioning. It’s not hard to understand the allure of outlet expansion given the attractive unit economics of lower store costs, the growing foot traffic from domestic value and international shoppers, and the merchandise model Coach employs. Industry sources estimate sales at the leading outlet centers to be up to $75 million annually for Coach and Ralph Lauren. With sales-per-square-foot productivity in the outlet channel estimated 2X’s to 4X’s that of full price, Coach’s factory sales could represent as much as two-third of its North American sales of $3.5 billion.
In sum, new marketing highlighting Coach’s New York roots (a real plus globally), improved product, and a more engaged team should stem market share loss to Kate Spade, Tory Burch and Michael Kors. Coach currently holds about 30% of the US handbag market with the bulk of transactions occurring in Coach Factory Stores at outlet centers. In terms of product quality, Coach offers much more bang and bag for the buck, but the brand just isn’t sexy now. Sizzle sells and Michael Kors has it, now. Though a read of the KORS 10-K is perhaps prescient, “We are a rapidly growing global luxury lifestyle brand led by a world-class management team and a renowned, award-winning designer. Since launching his namesake brand over 30 years ago, Michael Kors has featured distinctive designs, materials and craftsmanship with a jet-set aesthetic that combines stylish elegance and a sporty attitude. Mr. Kors’ vision has taken the company from its beginnings as an American luxury sportswear house to a global accessories, footwear and apparel company with a presence in over 85 countries.” A bit too self-congratulatory, don’t you think?
I’m betting on the bench strength at Coach along with the new leadership and their ability to invigorate the team and the brand. By holiday the stores will have a new look with new product and a sprinkling of lifestyle merchandise and consumers should begin to respond.