Luxury

Luxury Brand Coach Moves to Sell Shoes


Luxury handbags and shoes at a Coach store in New York

Photograph by Victor J. Blue/Bloomberg

Luxury handbags and shoes at a Coach store in New York

Coach (COH) has fought for relevance in recent years, first introducing bling-laden products to attract younger shoppers and then bringing back more classic lines to appease its longtime customers. Yet all the while the company remained true to its roots: finely crafted leather bags. Now, as upstarts such as Michael Kors Holdings (KORS) and Tory Burch challenge its dominance of that market in the U.S., Coach is broadening its focus in hopes of ultimately becoming a full-fledged lifestyle brand that outfits customers from head to toe.

It’s starting with shoes, a business that’s more competitive and growing more slowly than handbags. Footwear also presents challenges Coach hasn’t faced much before: While bags will always fit over a woman’s arm, shoes come in sizes, and Coach runs the risk of having too many or too few sizes in stock. And shoes don’t lend themselves to the gallerylike presentation that’s worked so well for Coach’s bags in its own stores. All that’s caused analysts to worry whether the product expansion could put the company’s legendary profitability (gross margin was 72.8 percent in its most recent fiscal year) at risk. Says Brian Pitera, a principal at consultant A.T. Kearney: “Coach’s shoe strategy is an uphill battle.”

Coach could find it tough going because it’s moving into shoes primarily as a defensive move, says Robert Burke, founder of a namesake luxury research firm in New York. Fashion companies typically expand this way when they’ve grown so strong in their initial market that customers demand the halo of the brand on other items. Ralph Lauren (RL), for example, began selling men’s ties four decades ago, and its founder diligently built his English country life and American West brand imagery, methodically applying it to more categories, from men’s to women’s to kids’ to home goods, layering in labels in different price ranges.

That’s not the case with Coach, Burke says. In recent years, Michael Kors, Ralph Lauren, Tory Burch, and Fifth & Pacific’s (FNP) Kate Spade brand moved aggressively into Coach’s territory, chasing handbags’ lucrative margins. Coach for the first time said its North American handbag market share slipped, to 30 percent, in the quarter ended in December. In January, after spending years content to dominate the handbag market, Coach told investors it would use new store layouts and ad dollars to convince shoppers it’s becoming a lifestyle brand of clothing, jewelry, and more, not just a seller of handbags.

In an e-mail response to questions, Coach spokeswoman Andrea Resnick said footwear is “a significant opportunity” for the company. “We are in the early stages,” she said. “We will move purposefully.”

Coach has offered some shoes before, such as $98 casual “C” logo sneakers. Its new line, introduced in more than 170 North American stores in March, is larger, more fashionable, and higher-priced, with styles including Nala faux python pumps for $248 and Dalia ballet flats at $138. The company has installed shoe salons in some flagship stores and made footwear the feature of its windows in more than 75 locations.

The shoes will be added to Coach stores globally in the second half of 2013, and the company will try to boost shoe sales at department stores that carry its wares. The retailer is considering men’s shoes, too. “We see ourselves growing a very substantial footwear business,” Victor Luis, who is slated to become Coach’s chief executive officer in January 2014, said at an investors conference last month.

Coach forecasts its retail footwear sales will hit about $250 million in the fiscal year ending in June, while declining to provide the prior year’s shoe revenue. In 2012, Coach got $333.4 million, or about 7 percent of its sales, from products other than handbags and accessories.

Investors have so far been skeptical of Coach’s plans. The shares rose 5.7 percent this year through June 10, trailing the 19 percent gain for the Standard & Poor’s 500 Consumer Discretionary Index and Michael Kors’s 22 percent increase. Part of the caution is over footwear’s prospects. Total U.S. sales of women’s shoes rose 3.5 percent, to $23.5 billion, in the 12 months ended in March, slower than the handbag category’s 5 percent advance, to $7.24 billion, according to market researcher NPD Group. Stores also have to carry lots of sizes, and markdowns to clear inventory could eat into margins, says Cowen & Co. analyst Faye Landes.

Coach’s almost 73 percent gross margin—the portion of sales left after subtracting the cost of goods—beats Ralph Lauren’s 59.8 percent and far exceeds the 44.7 percent logged by shoe-focused Deckers Outdoor (DECK), owner of the UGG brand. Coach Chairman Lew Frankfort said in April that footwear will help boost sales and profitability and won’t materially affect the company’s overall operating margin. The early read on the shoe strategy has been positive, the company told investors in April. Shoes’ share of sales at the 170 Coach stores where the expanded line has been added grew to almost 12 percent in the five weeks following their introduction, up from 3 percent.

The bottom line: Coach, whose North American market share has slipped to 30 percent, is moving into shoes. Profit margins could suffer.

Timberlake is a reporter for Bloomberg News in Washington.

The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • COH
    (Coach Inc)
    • $37.12 USD
    • 0.15
    • 0.4%
  • KORS
    (Michael Kors Holdings Ltd)
    • $75.21 USD
    • -0.09
    • -0.12%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus