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WIKI ANALYSIS
Coach Inc. (NYSE: COH) is a leading retailer of premium handbags and accessories, located primarily in North America and has recently expanded into Asian markets. Basing its image on "affordable luxury," Coach seeks to establish a premium brand that caters to affluent consumers but also provides lower-priced goods to appeal to the demand of middle-class customers. In the luxury good niche market, COH competes against European rivals Louis Voitton , Gucci, and Prada.
Due to its effective merchandising and brand-building, Coach has boasted high operating margins and increasing popularity within the U.S. and Japan for years, and even in the suffering American economy Coach is one of a few retailers to post an increase in sales from fiscal 2008 to fiscal 2009. The company also intends to take advantage of increasing luxury consumption in China by taking more control of its retail operations there and building its own stores instead of relying on third-party retailers. During Q1 2010, ended September 26, 2009, COH benefited from the successful launch of its new collection, Poppy. [1] As COH continues to develop its ultra-luxury collections, the company will share in the recent increase in spending in luxury good markets as the affluent release pent-up spending power from the last year. [2]
Business Overview
Coach is a leading American manufacturer and retailer of leather goods, accessories and apparel for men and women. Coach occupies the affordable luxury segment, which provides high-end merchandise for both high and middle-income consumers. For example, prices for a Coach handbag can range from $298 to $6,000.[3]
Business and Financial Metrics
Coach is divided into two main revenue segments:
- Direct-to-consumer(84% of Fiscal 2009 sales) consists of retail and factory stores in the United States and Japan, in addition to the Coach website and catalog.[4]
- Indirect(16% of fiscal 2009 sales) consists of wholesales to department stores in the United States and Asia.[4]
Fiscal Year 2009 (ended June 27, 2009)
- Net sales for fiscal 2009 were $3.23 billion, a 1.6% increase from fiscal 2008.[4] The increase may be attributed to the opening of new direct-to-consumer stores in the Chinese market and the favorable currency translation of Japanese sales revenues. .[4]
- Net Income was $622 million , down from 2008's $742 million.[4]
- Operating Margins were 30.1% for the year, down from 36.1% in fiscal 2008. [4]
Fiscal Q1 2010 (ended September 26, 2009)
- Net sales for fiscal Q1 2010 were $761 million, a 1% increase from fiscal Q1 2009.[5] The increase may be attributed to the successful launch of the its new collection, Poppy, targeted at a younger female demographic.[1]
- Net Income was $141 million, down from the prior year's $146 million.[5]
- Operating Margins were 29.3% for the year, down from 31.0% a year ago. [5]
- China: Following the management's previously announced strategies, COH continued to expand its direct-to-consumer sales in the Chinese market, which increase 10% to $654 during the quarter. [1]
Fiscal Q2 2010 (ended January 20, 2010)
- Compared to Q2 FY2009, net income rose 11% to $240.1 million ($0.75/share).[6]
- Same store sales increased 3.2% in North America -- the first quarterly increase since Q1FY2009.[6]
Efforts to Combat Recessionary Pressures
Although 2008 and 2009 were marked by significant markdowns by retailers desperate to encourage shopping and decrease inventory, Coach managed to maintain its price level and instead sales at its factory stores increased as more consumers sought a bargain. Maintaining price levels and avoiding discounts is essential to the company's image as a near-luxury retailer. In an effort to combat depressed sales prices, Coach has hired Reed Karkoff, the CEO of Prada's USA division to head its new ultra-luxury division. The new segment will consist of apparel and will be sold in a very limited number of independent boutiques. The Reed Krakoff line will not be sold in Coach stores and prices are estimated to range from $495 to $1,195. [7] This new division is an attempt to appeal to luxury customers even though the Coach mainline has slashed prices in response to the recession. Half the company's product offering are priced below $300.[8] In addition, in its most recent quarter Q1 2010, Coach reported margins and profit that was higher than Wall Street expectations, leading Jefferies to upgrade the company to "Buy" status. [9]
Tiered Pricing Structure
Coach’s product is classified as a “luxury” item but is accessible to a larger market due to the variety of price points that the company offers. Analysts have noted that this tiered pricing strategy is not common in the luxury goods industry, which on average has higher entry-level price points than that of Coach. This pricing strategy is very similar to that used by Tiffany (TIF) and other brands in the affordable luxury market. This pricing structure allows the company to attract affluent consumers while also providing lower-income consumers access to a brand they would not be able to afford otherwise.
Branching into Other Product Categories
Handbags are the company's main driver of sales. However, since fiscal year 2006 handbags as a percentage of total sales dropped from 65 to 62%.[4] Accessories as a percentage of total sales increased from 28 to 29%[4] and all other products increased from 7 to 9%.[4] Though small, these changes are evidence of the fact Coach has been attempting to diversify its product offering. During fiscal year 2008, Coach expanded its jewelry line to include sterling silver and gold-plated fashion items. Also, in 2007, the company entered a partnership with a division of Estee Lauder Companies (EL) to produce perfume. During fiscal year 2008 this partnership was expanded to include lip gloss and body lotion.[4]
Note: Accessories includes men's and women's wallets, belts, keychains and watches. Other Products includes footwear, apparel, eyewear and fragrances.
International Opportunities
Coach has an established presence in the U.S. and Japan and is expanding into other Asian markets. Coach has virtually no European presence and has no plans to compete against established brands there.
Japan
Coach, Inc. first entered the Japanese market in 2001. Fiscal 2008 sales rose 23.4% from fiscal 2007.[10] At the end of fiscal 2008 Coach had 149 stores in Japan.[11] Coach's Japan operations constituted 19% of net sales in fiscal 2008. Currently, Coach is the #2 highest-selling handbag retailer in the country, though its 8% market share is dwarfed by Louis Vuitton's 28% share.
Other markets
Coach has an aggressive plan in place for expansion within Asia, including China. Macroeconomic downturns in certain parts of Asia thus may have a negative impact on Coach's operations now and going forward. China is expected to be a growth market for this industry with the emergence of a decent-sized middle class there and expected continued economic growth.
Trends and Forces
Coach Performance Remains Strong Despite Flagging Economy
Retailers have had to weather a difficult economic environment during 2008. Many Americans are unsure of their financial security; companies have resorted to laying off workers in an effort to cut costs. In an uncertain economic environment consumers seek to cut costs and save as much money as they can, and clothing is usually the first to go.[12] This decrease in consumer confidence has adversely affected many retailers across all levels, from low-priced brands to luxury stores. Coach, however, has managed to maintain strong sales in a time when its counterparts are struggling to keep consumers buying their products. The company's strong sales are primarily a result of higher sales at factory stores (consumers who want to spend less would be more attracted to discounted merchandise) as well as an especially strong product offering: the Madison line of handbags, which combines a popular design with a lower price point than previous handbags--an effort to provide a high value proposition to its customers.[13] Net sales for the first quarter of fiscal 2009 were $753 million, an 11% increase from the same period last year.[13] Direct-to-consumer sales for the same period rose 16% to $592 million.[13] This good performance allows Coach to enter the holiday season in a much better position than many other retailers that have had to face declining sales.
Coach Seeks to Take Advantage of China's Growing Affluent Class
Coach has primarily stayed focused in North America and Japan. However, China is becoming an increasingly important market for luxury retailers. The rise of China's middle class has led to an increase in disposable income and thus an increase in potential customers. China spends more than $2 billion a year on luxury products.[14] In addition, by the end of 2006 the country had 345,000 U.S. dollar millionaires, a third of which (115,000) were women.[14] What this means is that there is a growing affluent class in China that is capable of purchasing Coach products across all price points. In March 2008 Coach entered an agreement with ImagineX, its Asian distributor, to acquire 24 retail locations by May 2009.[15] This deal will allow the company greater control over its Asian operations and allow it to better take advantage of the country's new wealth. Over the next 5 years Coach plans to open a total of 50 retail locations in China and increase its market share from 3 to 10%.[14]
Luxury Image Essential for Sales
As with any luxury or affordable luxury retailer, Coach heavily relies on an image of exclusivity to fuel interest and sales of its products. A luxury company can lose its "luxury" status if the brand becomes too popular or too accessible. Coach thus takes a risk by having factory stores that sell discounted merchandise. None of Coach's competitors, such as Louis Vuitton and Gucci, have factory stores--they would be in direct opposition to the air of exclusivity the brands seek to cultivate. However, Coach protects its luxury status by placing its factory stores at least 60 miles away from its full-price locations.[16] In addition, the factory stores never sell the latest merchandise--they sell last year's or irregular pieces in addition to products that are manufactured specifically for the factory store. Coach never has sales at its full-price stores and does not allow retailers such as Macy's Inc. (M) to discount its merchandise. The result of these actions is that the factory stores and flagship locations serve two different demographics and are separate enough that the factory segment does not tarnish the overall image of the brand.[16]s
Competition
Most of Coach's closest competitors are either privately owned or owned by larger European conglomerates of various luxury brands. Consequently, comparative data is unavailable. This includes Louis Vuitton and Fendi, both owned by LVMH Moet Hennessy L.V. (LVMUY), and Gucci Group.
Coach's business model is chiefly distinguished by its stress on "accessible luxury." This model thus reaches a larger demographic compared to many of Coach's higher-priced competitors, including Louis Vuitton, Gucci, and Prada. These competitors tend to focus on a higher income, high-fashion demographic. Companies like Dooney & Burke and Cole Haan also stress "accessible luxury" and are Coach's most successful competitors; however, Coach's market share has continued to increase in their presence.
Coach's broad appeal and high volume, well-scaled operations allow it to maintain operating margins at 37.1% in 2008.[17] This margin is high compared to other luxury companies such as the fashion and leather goods division of LVMH Moet Hennessy L.V. (LVMUY), whose operating margin in 2008 was .[18]
References
- ↑ 1.0 1.1 1.2 Coach Q1 2010 Benefits from Launch of Poppy
- ↑ Luxury Spending Sees a Boost
- ↑ Coach website
- ↑ 4.00 4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 COH 2009 Annual Report
- ↑ 5.0 5.1 5.2 Coach Q1 2010 Beats Estimates
- ↑ 6.0 6.1 6.2 Reuters, "Coach North American sales disappoint, shares off," 1/20/2010
- ↑ Coach says Prada US head to take reins of new unit
- ↑ UPDATE 1-RESEARCH ALERT-BofA-Merrill upgrades Coach to buy
- ↑ Jefferies Upgrades COH to Buy
- ↑ COH 2008 Annual Report pg. 21
- ↑ COH 2008 Annual Report pg. 4
- ↑ James Russo. Times Are Not As Tough for Some: Consumers in emerging markets are likely to perceive the recession will be short.
- ↑ 13.0 13.1 13.2 Coach, Inc. F2Q09 (Qtr End 12/27/08) Earnings Call Transcript.
- ↑ 14.0 14.1 14.2 Joseph Chaney. Handbag brand Coach plans major expansion in China..
- ↑ COH 2008 Annual Report pg. 1
- ↑ 16.0 16.1 Coach's Split Personality.
- ↑ Coach (COH) Annual Report 2008, Financial Highlights
- ↑ LVMH Moet Hennessy (LVMUY) Annual Report 2008
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