Upscale handbag retailer Coach said Tuesday that despite its pullback from department stores and discounts, Q2 net sales rose 3.8% to $1.32 billion from $1.27 billion in the year-ago period, meeting FactSet consensus expectation cited by MarketWatch.
Coach reported Q2 net income of $200 million, or 71 cents per share, up from $170 million or 61 cents per share in the same quarter last year. Adjusted earnings were 75 cents per share, beating the FactSet consensus of 74 cents.
Coach's total North American brick-and-mortar same-store store sales rose approximately 4%, while aggregate North American same-store sales increased approximately 3%, including the negative impact of e-commerce. As planned, sales at North American department stores declined some 30% on both a POS and net sales basis, the company said.
Coach appears to be successfully threading the needle as it repositions itself as an upscale retailer. Its 1941 collection, now being promoted by new brand ambassador Selena Gomez, is selling at higher average prices, according to retail analysts at Jane Hali & Associates.
“We feel [Coach's] product is design-led,” Jane Hali wrote in a note emailed to Retail Dive. “As they continue to revamp their image, they offer a modern retail experience in their retail stores as well as their shops in department stores. As they continue to focus on millennials, their capsule collections with Mickey Mouse sold well. We expect the welcome of Selena Gomez to their brand will generate more hype among the millennial consumer.”
But the return to higher prices is hitting Coach's e-commerce numbers, according to Neil Saunders, managing director of GlobalData Retail (formerly Conlumino).
“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%,” Saunders wrote in a note emailed to Retail Dive.
Coach's North American e-commerce present "a slight area of disappointment," Saunders noted. "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.”
Overall, though, Coach's second-quarter results show that it can more than afford to exit department stores that don’t (or can’t) sell its goods at premium prices. “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,” Saunders said. “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.”
The key to continued success will be found in the production of goods that resonate with customers at the higher prices Coach is seeking to maintain and a marketing strategy that gets the story in front of consumers — a particular challenge considering that millennial shoppers are less likely to gravitate to a so-called “it” bag. Some of that will happen by appealing to men, Saunders said.
“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,” Saunders said. “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.”