US fashion retailer Coach continues to struggle, continuing its run of quarterly sales declines.
But at least the drop is now in the single figures – just – following a four quarter run of double digit declines last financial year.
“While the 9.3 per cent sales slip at Coach is something of an improvement… it still represents a dire performance of a brand that is struggling to reinvent itself,” observed Conlumino retail analyst Håkon Helgesen.
“Indeed, this year’s year over year drop comes off the back of a 10 per cent fall in net sales in Q1 of last year, and is the first time in five years that the company has opened its fiscal with sales of under $1 billion.”
The Coach results reflect a classic example of a company that has became a victim of its own success, argues Helgesen.
“A dominant position in the North American market meant its products became ubiquitous – something that sits uncomfortably with the concept of luxury, where a degree of exclusivity needs to be maintained. This ubiquity was fuelled by Coach’s heavy expansion into malls, the widespread use of promotions, and the introduction of cheaper, more accessible products,” he says.
“While such tactics drove growth for a while, they ultimately tarnished the company’s luxury positioning, and the sales to those looking for products with cachet declined.”
Coach is trying to reverse this position and to become less reliant on discounting and promotions for volume.
“In our view, this move is directionally correct, but executing it has put significant strain on the company’s top-line financials. In many ways, the price for rebuilding brand equity is that of becoming a smaller, more focused business.”
Helgesen says one of the main areas of concern is the company’s inability to rebuild its gross margin.
“While it would be unreasonable to expect see a substantial uplift in this metric at the current stage of transformation, it should nonetheless be edging upward as the company cuts back on promotions and discounting and integrates more premium product into its assortment.
“However, the number is actually trending downward with margins this quarter falling to 67.6 per cent from 68.9 per cent in the prior year. This, in turn, is exerting pressure on the bottom line where Coach saw its quarterly net income fall by 19 per cent.
“Admittedly, some of this is down to exchange rates, but we believe even within North America margin uplifts remain soft.”
Helgesen says to a degree, the upheaval is to be expected as repositioning a brand takes time.
“Fortunately, there are some indications that the strategy will eventually bear fruit. These include the relatively strong performance of the Stuart Vevers collection, and the better comparative numbers coming from US stores which have been refurbished.
“Coach still has a long way to travel on its journey of reinvention but the signs of recovery should, in our view, become more tangible later in this fiscal year,” he concluded.
