Saturday, January 14, 2017

Coach (NYSE:COH)

Coach's sales and profits have dropped for the past 3 years, but the company is now supposed to be in a turnaround.

Before looking at the numbers, the most important thing for luxury goods is branding: a combination of consistent pricing, retail environment and advertising.  Styles come and go.  But consistent branding means a company can survive product flops and style disasters:

Here in Asia, Coach is mid-range luxury, compared to brands such as LV.  All bags are sold through their own stores, or their 'store-within-a-store' in upscale department stores.  Prices start around SGD 500 for a leather handbag.  But occasionally in some places, you could still see piles of the old cheap 'CC' bags on wooden racks, where some enterprising person has imported a few and set up a temporary shop.

And this is the problem - Coach is actually two brands:

  • An "Accessible luxury" brand, around USD 400 to 1000 for a nice bag.  Still expensive, but affordable:

  • A cheap knockoff brand available at "Outlets" and "Factory" stores.  Which has cheaper (MFF - made for factory) versions of the same products:

The factory outlets sell different versions of the same models under the same brand name.  You can tell the two apart by looking at the bag's serial numbers.

Coach has destroyed their brand by opening outlets and selling cheap versions of their products.   Some comments from the purseblog forum about the brand's history:

It used to be a luxury brand about twenty/twenty-five years ago. Coach's quality took a huge nose-dive in the 00's, for sure. The advent of the Coach outlet brought it down. I remember when Coach bags used to be displayed behind the counter and in the glass cases at department stores (late 80s and 90s for me). The bags were all thicker, sturdier leather back then. (link)

It'll be very interesting to see if Coach will be able to backtrack from the endless turnover/scarcity marketing/quick markdown schedules that has characterized their brand for the past 10 or so years. LV still makes Speedy, Chanel still makes GSTs. Does Coach (outside their classics line) make anything from even 2 years ago? That's what keeps them from being considered high end, IMO - they have a lower-end selling scheme. (link)

And about the relentless markdown or copying of boutique products:

Phoebe's ... not valid on PCE ... then they were valid ... since then SAS and outlets ... now they actually *are* a MFF bag. (I literally :lol: out loud when I type that.)

Legacy from five years ago ... some were not valid on PCE ... then were valid on PCE ... then "they'll never go to outlet" ... then they did ... then MFF came up with some very similar versions.

Boroughs ... not valid on PCE ... then they were valid ... then on SAS and outlets (and I got a few through both routes and love them dearly) ... then MFF actually made their *own* Boroughs.  (Feb 2016 - link)

This is another reason I have yet to pull the trigger on the oxblood rogue (plus no boutiques near me carry the rogue to see if it's really worth the $). My boutique swears it will never hit the outlet, go to SAS, or allow PCE but we have all heard that story before. 

...I rarely buy anything full price because I know there is always a department sale or pce coming up. I would be comfortable paying $795 for a rogue if I knew it wasn't going to be deeply discounted at Macy's or hit the next SAS at 40% off. (Feb 2016 - link)

Coach presented a turnaround plan in 2014, which involved:

  • Closing 20% of their boutique stores, and 'consolidating' some of they factory outlets
  • Upgrading their factory outlet stores
  • Selling new designs from Stuart Vevers
  • Limit discounting (PCEs - Preferred Customer Events).
Have they done this?  Yes, and sales/profits have recently improved.

But fundamentally, Coach still sells 2 different priced brands under the same name.  The company does not give a breakdown of revenue/profits from outlets, which is estimated at 70% (1) (2) (3).  But they give the numbers and areas for different store types.  The trend is clear:

Looks like Coach will never get rid of its outlet stores.  And until they fix this, I won't consider the shares no matter how good the finances are.  If you're brand is no good, then you have to compete on fashion/design/fads/whatever, which is unpredictable.

Selling the same brand at two different price points is misleading.  Making cheap knockoff copies of your own products and selling them a discount is lying.  My wife has seen bags that she likes, but won't buy them because they are Coach.

What would make me change my mind?  If they were to put their outlet stores under a separate brand, maybe.

Nice bag, but not buying it.

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