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Coach Committed to Turnaround Plan Despite Sales Slump

As we settle into the new year, our Sourcing Summit Companion Report looks ahead at ways to optimize processes and performance.

“We feel really good about Plan A. There isn’t a war room with Plan B in it. We feel great about the direction we’re heading in,” Coach CEO Victor Luis said Thursday at Bernstein’s annual “Strategic Decisions” conference in New York.

Shareholders, however, might disagree. Third-quarter results for the period ended March 28 were less than stellar: Profits fell 53.8% to $88.1 million; net revenue fell short of the expected $950 million, instead dropping 15 percent year-over-year to $929 million; and North American same-store sales stumbled 24 percent to $493 million.

Yet Luis maintained these negative numbers are in line with Coach’s turnaround plan. “We’re transforming a brand, a brand that has 75 years of history, a brand that has billions upon billions of impressions over the last decade, a brand that has hundreds of millions of consumer visits every year to its own stores as well as partners and the web, a brand with approximately 1,000 direct locations across the world. And we’re very much in the early stages of this transformation,” he stressed.

In a bid to gain back some of the market share it lost to the likes of Michael Kors and Kate Spade of late, Coach began overhauling its image a year ago, closing several under-performing full-price and outlet stores in the U.S., cutting back on promotional offers and flash sales and stepping up its fashion quotient by hiring Stuart Vevers, formerly of European leather goods labels Mulberry and Loewe, as creative director.

“If [the plan] was dependent on Stuart’s launches [at retail] in September and the business had to hockey-stick up and it transformed because it was about one single item or one single bag that would be great but that’s not what we’re dealing with,” Luis said.

In addition to shuttering select storefronts, Coach opened new ones under a “modern luxury” retail concept and renovated key locations to reflect this aesthetic. By the end of this fiscal year the concept will have rolled out to roughly 150 stores worldwide, including the outlet channel.

“All of these stores in varying degrees are doing tremendously better than the balance of chain and doing so across all metrics: traffic, conversion, ADT (average dollar per transaction) which bodes well as we continue our rollout,” he said.

But while Coach has tried to kick its discount-handbag image by remodeling itself into a premium lifestyle brand, one cold hard fact remains: Four out of every five handbags sold by the brand are purchased at its outlet stores, as Wells Fargo analyst Paul Lejuez recently pointed out to The New York Post. So when the company decided to scale back sales from twice monthly invitation-only events at full-price stores to no more than three annually, and slash outlet flash sales from three events per week down to two per month, the consumer response was plain to see: Shoppers stopped opening their wallets.

Again, Luis disagreed, “We’ve seen tremendous response in product above $400 where fashion and function have matched really well, and I think we’ll see us increase the number of doors that have those collection items at a higher penetration as well while also bringing in this balance of the below $300 and not being shy of pushing the above in a way in which we can balance the assortment and attract that fashion consumer who seems to be reacting really well to our assortment.”

With the company so intent on cultivating a new high-fashion image in not only its full-price stores but also its outlets, what’s the incentive to encourage customers to pay top dollar?

“We feel confident that what we’re doing is providing the consumer who does choose to shop in the outlet channel with a great experience, and the consumer who wants what’s newest from Stuart [Vevers], what’s best and most fresh and what’s in season is going to have to come to the full price channel and buy it at full price,” Luis offered, noting that Coach has no plans to walk away from the enormous opportunity that the off-price channel presents.

To all the naysayers, he added, “We’ve stated from the beginning this is a multiyear journey and what’s needed is consistency, belief and execution to perfection because this is about the consumer believing what we’re putting out there is fact and is true, and that takes time because they need to hear it from us, they need to hear from the editorial community, they’re going to hear about it from their friends, they’re going to read about it on social media. And eventually that creates desire, and desire creates value for us, for our shareholders, for our team and most importantly for the brand.”

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