By Neil Saunders
Coach’s turnaround program is making excellent progress, fiscal-end results signify. 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%, or by 7% on a constant-currency basis.
Coach has put considerable effort into store displays and collections, and these now look compelling and engaging. Window displays and the general selling environment are inspirational and engaging.
Within North America, the same story holds true. Reported sales were down just over 3%; taking into account the shorter quarter, sales rose by 4%, while direct-to-consumer sales were up by 5%. These are the strongest revenue figures of the fiscal—this when Coach was up against a high comparative from the prior year when North American sales rose by 9%.
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% on a POS basis, or 20% in net sales terms. The company started to dial back its involvement with department stores about a year ago, and the impact has been positive for the brand, helpful to profit, and ultimately beneficial for sales.
The decision to reduce reliance on department stores 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 compelling and engaging. 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 has rebuilt its favorable image and is increasing its market share in premium handbags and accessories.
The repositioning of the Coach brand is now almost complete. The label is back to a position of strength and is held in high regard by consumers. This is a marked turnaround from a couple of years ago, when constant discounting and oversaturation had eroded brand equity and had reduced the premium shoppers were willing to pay. Our data now show that Coach has rebuilt its favorable image with consumers and that it is increasing its market share in the premium handbags and accessories segment of the market. The brand has more work to do to maintain this momentum, but it is on the right track.
In addition to the sales uplifts, Coach’s efforts delivered an 86% improvement in net income, even after a higher interest expense. This is a solid gain, but it is clear that on both this and the sales front, future contributions from Coach are likely to be less generous. This is not due to any particular problem with the brand, but merely a reflection that the recovery program will lap tougher comparatives in the year ahead.
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 million to $35 million of synergy savings from the integration. However, 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.
Coach is hoping to rebuild the Kate Spade brand in the way it has done with its own label. If it succeeds, it will emerge as a significant luxury player and will probably be keen to make further acquisitions.
Neil Saunders is managing director of research firm GlobalData Retail.