Coach's price is right

Coach CEO Lew Frankfort credits the high-end bag company's shrewd pricing strategy for its recent success.

By TheStreet Staff Feb 16, 2010 12:43PM

TheStreetBy Jeanine Poggi, TheStreet


Lowering prices is risky for any luxury retailer. While shoppers love discounts, investors fear bargains could dilute brands. Coach (COH) has managed to appease both sides.


Coach CEO Lew Frankfort lowered entry-level prices 15%, a move that helped the company weather the economic downturn.


But let's be clear about one thing: Coach doesn’t call this a sale. Frankfort, in an exclusive interview with TheStreet, was adamant about this. There are no blaring signs in store windows drawing attention to lower prices, no advertisements highlighting value merchandise. Instead, Coach has been trying to surprise consumers who pick up bags they expect to be $500 and see they’re $200.



Coach’s Poppy line, which features handbags ranging from $200 to $300, received an overwhelming reception and provided a much needed boost during the holiday season. The line helped lift Coach’s North America same-store sales 3.2% during the second quarter, its first increase in more than a year.


Bing: For more on Coach


"Coach has one of the best management teams out there," Needham analyst Christine Chen says. "They reacted appropriately to the environment without tarnishing the brand."


Half of Coach’s merchandise costs $300 or less, compared to 30% a year ago.


"We are seeing a new normal evolving," Frankfort says. "For the foreseeable future, consumers will be price conscious in discretionary spending and we need to keep that in the forefront of our minds."


Coach doesn't plan to do away with lower entry-level prices any time soon.


This doesn't mean Coach is ignoring the high end. As Coach adds lower-priced items, it's expanding its offerings that cost more than $800, Wall Street Strategies analyst Brian Sozzi says.


Successful luxury retailers like Tiffany (TIF) and Nordstrom (JWN) are adopting similar pricing strategies.


Tiffany expanded its silver selection and introduced a more wallet-friendly Keys collection for the holidays. As a result, Tiffany sales over the November-December period shot up 17% to $799.1 million from a year earlier, which prompted the jeweler to boost its full-year outlook.


Nordstrom is also going after a "good, better, best" pricing strategy, and is building out its Rack outlet stores. The luxury department store reported a 14% surge in January same-store sales.


Although business may be picking up in the US, Coach's biggest growth opportunity is in China. Coach has 32 stores in China, with plans to add 11 by June. Frankfort says China's economy could support at least 150 locations.


Frankfort compares Coach's development in China to its growth in the US in the 1980s. "In the early ‘80s, Coach had a small cult following," he says. "We were in Chicago down to Washington, and not yet a national brand."


Between 1985 and 1995, the business exploded, boosting revenue by $20 million to $500 million.


Coach stores in China, where same-store sales are growing by double-digit percentages, have a loyal following, Frankfort says. Unlike the US in the ‘80s, China is still rapidly developing.  


Sozzi predicts Coach’s China business will add 20 cents to 25 cents to annual earnings per share during the next five years and 3 cents to 4 cents in the next 12 months.


Even with China tightening bank lending on Friday, Frankfort says he isn't worried. "China's decision to tighten lending does not affect our expansion plans in the country," he says. "The emerging middle class is taking hold and growing rapidly."


Best of all for Coach, Chen says, is that China's growing middle class can’t afford European luxury brands, making Coach an attractive alternative.


While Coach operates in 25 international markets, Frankfort wouldn't call the company a global brand. That could change soon: Frankfort says he will soon announce plans to open stores in a Western European country, declining to say which one.


Looking closer to home, Frankfort says Coach is considering opening and expanding stores, even as other retailers shuttering locations. Although Coach has 350 locations in North America, Frankfort predicts the company could have 500 stores in the not-too-distant future, and is targeting cities like Anchorage, Alaska; Madison, Wis.; and Baton Rouge, La., with plans to roll out 20 new stores this year.


The company will also launch its first men's store in New York City in May. Frankfort says a men's store will give it a "laboratory to work on emerging collections and merchandizing techniques." Management believes the new concept will have the most success in Asia, where men are more interested in accessories like tote and travel bags. Sozzi, for his part, says the men's store presents an interesting opportunity, as there are not many accessories stores that cater to men.


Coach is no doubt a standout in its sector. Still, some analysts are wary of the stock, which is trading at a premium. Shares of Coach closed on Friday at $35.47, near the high end of its 52-week range between $11.41 and $38.65.


As a result, Goldman Sachs (GS) analyst Adrianne Shapira downgraded Coach last week to “neutral” from “buy” and cut her price target in the company's shares to $37 from $42.


Shares of Coach are hardly trading hands at sale prices, but if we've learned anything from Frankfort, it's that Coach does not do sales.


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