By Neil Saunders
After an anemic start to its fiscal year, Coach now appears to be back on track with a respectable set of holiday quarter numbers. Admittedly, comparatives from the prior year were fairly soft — especially for North America where sales dropped by almost 7% on a total basis – but this does not take away from the fact that the company is headed in the right direction.
The direct to consumer part of Coach’s business in North America is clearly pulling in some trade lost from department stores. With greater control over its brand, Coach is in a much better position to reenergize and bolster its brand. Much of this will come down to a good pipeline of new designs, strong marketing, and the effective use of its stores and website.
Given the weakness of the prior year, it is possible to view the North American numbers as unremarkable. However, given the pullback from wholesale and from channels like department stores, growth levels are fairly encouraging. Indeed, the North American performance came despite a 30% decline in Coach sales via department stores.
The direct to consumer part of Coach’s business in North America is clearly pulling in some trade lost from department stores, which is one of the reasons why growth in this part of the business increased by 5% over the period. With greater control over its brand, Coach has been able to engineer a more premium position by reducing discounting and promotional events. This has helped to ease up margins which, ultimately, aided net income which increased by 17%.
A slight area of disappointment came from e-commerce in North America. Here sales shrunk over the prior year, something that we believe is a function of reduced promotions which affected website traffic and conversion. While Coach should not return to its heavy levels of discounting, we believe it needs to explore ways to drive more custom through the site. This will be important if it is to maximize the number of customers it can capture as it pulls back from department stores, and also as a buffer against declining mall traffic.
International was another soft spot in the results with growth levels down on the last quarter and the prior year. However, much of this comes down to currency fluctuations and it is clear that, on an underlying basis, sales performance is accelerating in China, improving in most of Asia, and remains fairly robust in Europe. While we expect international to remain positive, we believe that currency pressures will continue to diminish growth across the remainder of this fiscal year.
Looking ahead, now that Coach has largely sorted its channel and promotional problems, it is in a much better position to reenergize and bolster its brand. Much of this will come down to a good pipeline of new designs, strong marketing, and the effective use of its stores and website to showcase products to customers. However, some uplifts will also be gained by strengthening its presence in categories like mens and fragrance. As it comes up against tougher comparatives, Coach will need to pull all of these levers if it is to continue to deliver uplifts across the second half of the year.
Neil Saunders is CEO of research firm Conlumino.