Why Goldman Sachs Believes Coach's (COH) Turnaround Is Alienating Consumers

momtok

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I was just looking up articles to try to explain to hubby the downfall in Coach's stock over the last year or so, and the reasons for all these changes now, in an attempt to recover (for lack of a better word) both the company, the image, and the stock.

One of the first articles I found is from only a couple days ago. Sept. 9.

Oy.

http://www.thestreet.com/story/1287...-be-affected-by-this-analyst-reiteration.html

Why Goldman Sachs Believes Coach's (COH) Turnaround Is Alienating Consumers

NEW YORK (TheStreet) -- Analysts at Goldman Sachs (GS_) reiterated Coach (COH_) as a "sell" this morning, saying, "We believe Coach's high-fashion focused brand turnaround strategy is doing incremental harm by taking the assortment too far out in both its aesthetic and price points, ultimately alienating consumers."

Separately, on Tuesday, the retailer named Gebhard Rainer to President and Chief Operating Officer, a position that's been vacant for the past year. Rainer, who starts his position on September 29, was formerly the CFO at Hyatt Hotels. He will be responsible for finance, information systems, logistics, operations and production at Coach.

"We believe this is a good hire," Stifel analyst David Schick writes in a research note. "Our quick checks suggest Rainer was well liked by the Street, brings International operating experience, has significant IT and procurement experience, and was part of moving Hyatt 'up-market'."

"The old COH team and model is rapidly giving way to the new team and model," he writes. "Sticking with the old plan too long had meaningful negative consequences -- but the BOD and company are making significant changes and bringing in new expertise."

Coach warned in June that it expected revenue to fall by a double-digit percentage for fiscal 2015 and next year it would close 70 underperforming stores. Coach CFO Jane Hamilton Nielsen told investors that fiscal 2015 is "the invest and reset year, largely is a function of our reduced promotions and store closing activity, we expect to see low double-digit revenue decline."

Coach's same-store sales fell 17% in the quarter due to weak store traffic, following a 1.7% decline a year ago, as consumers can't get enough of rival Michael Kors (KORS_) handbags and other offerings.

Shares of Coach are down 31% over the past year, and shares were off 1.8% to $36.66 on Tuesday. Michael Kors shares are flat for the past 12 months.

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Separately, TheStreet Ratings team rates COACH INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate COACH INC (COH) a HOLD. The primary factors that have impacted our rating are mixed some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and weak operating cash flow."

You can view the full analysis from the report here: COH Ratings Report

Why Goldman Sachs Believes Coach's (COH) Turnaround Is Alienating Consumers
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My comment to hubby. ----- "Alienating customers, eh? So who wants to tell these experts about the great feather fob debacle?" :lol: :wacko: :wacko:

And just for the record, I love Coach. I've always been a fan of Coach. But even if some of us remain as loyal as ever, they still seem to be shooting themselves in the foot. ... Both feet. ... Over and over.
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momtok

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Here's another interesting one, this one from August 15, from MotleyFool (a financial publication whose articles have often been posted here during discussions of COH stock). I have not read all of it yet.

http://www.fool.com/investing/gener...y-coach-isnt-gaining-traction-on-its-tur.aspx

This Is Why Coach Isn't Gaining Traction on Its Turnaround

By Rich Duprey | More Articles
August 15, 2014 | Comments (0)

Handbag maker Coach (NYSE: COH ) has often appeared directionless, a brand without cohesion that lacked a way to connect with the consumer. The company is throwing a lot of ideas at the wall lately hoping something sticks, but instead all it's really done is give off mixed messages that have confused consumers and may undermine any chance of a turnaround.


The Coach handbag in its native environment.

On the one hand it says it's been too promotional, its bags too ubiquitous, and that its outlet stores undercut the premiums paid by consumers at its full-price stores. As a result, it's closing 70 stores, a fifth of its North American footprint, scaling back to holding just two semi-annual doorbuster sales each year, and changing its positioning from one of "accessible luxury" to "modern luxury."

That could be a fruitful pursuit because Coach's bags above $400 comprise 21% of sales, up from 16% a year ago. Indeed, handbags above $600 were its strongest price point, but hand in hand with that change in its core message is a conscious decision to become both a dual-gender brand and a "lifestyle brand," one that sells key fobs, shoes and fragrances right along with its handbags and leather goods.

Living la vida loca
That sounds good for a company targeting the aspirational customer, but maybe not so much for one seeking to be a premium goods destination. No longer is it "a leading marketer of modern classic American accessories," but rather it is one featuring "modern luxury accessories."

That's a subtle but important difference especially when it doesn't have a marquee name on the masthead to bring people into the "lifestyle." Where Michael Kors (NYSE: KORS ) and Kate Spade (NYSE: KATE ) can turn to their company founders to attract consumers to their brand extensions of stationery, personal organizers, pajamas, and eyewear, Coach has had to rely upon the hired help to generate the same cachet.

Last year Stuart Vevers joined the fold as Coach's top designer, taking over for Reed Krakoff, who bought out his namesake brand from the handbag maker after 16 years of service as its creative director.

Don't discount the impact of sales
After years of leading the market with growth that exceeded the industry norm, now it's Kors and Spade who are recording substantial gains in both sales and comps. Still they're also seeing their stocks decline because of the discounting they've had to engage in, something Coach investors are all too familiar with.

So, it's a bit of a problem across the industry, but Coach compounds it by offering conflicted signals about what it's going to do, and then fails to connect with consumers anyway.


Logo-heavy gear like this hasn't sold all that well.

How gauche!
According to its own marketing research, Coach has the top mind-share with consumers in three of the five categories associated with the emotional attributes of a brand, but comes up short in what may be regarded as two of the most crucial areas.

Carrying a Coach handbag apparently makes a woman feel confident, put together, and complete, which is all fine and dandy, but it falls down on being fashionable and sophisticated. For a fashion-oriented company to not be seen as fashionable is a huge hole it needs to fill.

I would imagine an accessories maker like Coach could actually stumble badly on the first three so long as a customer views its products as fashionable and sophisticated. You could overcome your other shortcomings because fashionability would allow you to play toward your entire catalog of products, helping you sell more accessories to create a total package.

But Coach has gotten it backward: Because its handbags aren't viewed as fashionable, there's little it can sell to make up for that and the whole suffers.

Even in its fastest-growing market, China, clouds are forming. It continues to post double-digit growth, that's true, but the rate of that growth is falling dramatically. And with the country suddenly experiencing its own economic slowdown -- China's central bank said extension of new credit fell in July to its lowest level since the global financial crisis and its housing sector is much worse than it's previously let on -- the probability that Asia won't be able to prop up Coach's business much longer looms large.


Data: Coach earnings conference calls

Similarly, men's sales is another trend the leather goods maker is counting on to keep it going, but as we've seen with China sales, the rate of growth is falling precipitously. Coach has also pushed out to 2017 when it believes men's will hit $1 billion in sales annually, suggesting a compounded annual growth rate of 12% or so, and falling to 10% within the next five years.


Data: Coach earnings conference calls

What this tells us is that Coach's North American business is a shambles, and despite the seemingly robust growth in China and for men's goods globally, there is significant deceleration under way. Of course, no retailer can continue growing at exponential rates, but that's just the point: Coach can't count on these two avenues to bolster its business any longer, which calls into question whether its stock can sustain its current levels.

There's still room below
Looking at both trailing and estimated multiples, shares of the handbag maker don't look overpriced, but when you compare it to its sales and its forecasted growth rate, Coach shares look very rich.

In short, Coach needs to decide exactly what part of the market it wants to be in, play to its strengths there, and stick to it. As it is, the scattershot approach it seems to be taking will only serve to confuse consumers more.
 

weibandy

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What is nice here is that expectations are low. The stock price has fallen a lot. Operationally, Coach is good at doing large volume And the majority of operational investments are done (save for an odd buildout of an office tower for their hq). Now they are attempting to push the brand up and regain share of mind in the fashion sensitive world. It is difficult, expensive and Coach has to do it in volume. Nit easy and not fast.

I think they have made a decent first effort. Is it enough? Probably not. But it has gotten some attention and it has set a new style within the context of the existing brand,
 

abdoutots

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Apr 27, 2008
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Thanks for posting this. It's so discouraging to see some of their strategies. Coach has a major identity problem, they want to make the brand accessible to everyone at the factory stores, all the while marketing the boutique items as luxury, they can't have it both ways. Maybe if they stopped switching the floor set so quickly and rewarded loyal customers with PCE's and stopped pretending to be something they're not (I think the $650 price point on the Rhyders is unjustified), then MAYBE I would consider shopping at the boutique again.

I really like some of the stuff on this new floor set and would consider some of the items but I am happy to wait for them to show up at 50% off or more at my local outlet by Christmas time. That's just what Coach has taught me to expect as a customer.
 

melissatrv

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I am anxious to see any financial updates based on the sales of the current collection will make either wildly succeed or have to bring the execs back to the drawing room to come up a with a new "new strategy".
 

CoachCruiser

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I'm curious too, melissatrv. Thanks for the articles, momtok. Interesting reads, and very accurate - especially the observation about Coach throwing stuff at a wall and hoping something sticks. :/
 

abwd

Member
Jul 25, 2008
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Thanks for posting these articles. It does seem like they have it all backward and we all know that they have know idea who their customer is or who they want them to be anymore.
 

iNeedCoffee

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Jul 26, 2012
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It's so strange that according to the Motley Fool article, signature pieces aren't selling well, but that is still the majority of bags I see worn by women in my area. That being said, I am also starting to see more leather bags out and about; especially Phoebe.

As far as any type of strategy goes, I think discontinuing lines so quickly-and stopping the PCEs-are huge mistakes. I know I'd spend money in FP stores, esp with a PCE, for new bags made for the great lines of the past. Locking out loyal customers from the FOS has also really been a bad move. Really bad.

I totally agree that Coach seems rather lost these days, and that makes me a little bit sad. There was a time when, for me, Coach seemed to be THE brand of bag to wear. I am still loyal to the brand, but I will be buying the older styles on eBay and Bonanza, or waiting for the semi-annual sales and keep stalking outlets and the FOS ( if I don't get locked out. ).
 

momtok

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I am anxious to see any financial updates based on the sales of the current collection will make either wildly succeed or have to bring the execs back to the drawing room to come up a with a new "new strategy".
Perfect way to phrase it. :lol:

It's so strange that according to the Motley Fool article, signature pieces aren't selling well, but that is still the majority of bags I see worn by women in my area. That being said, I am also starting to see more leather bags out and about; especially Phoebe.
As far as any type of strategy goes, I think discontinuing lines so quickly-and stopping the PCEs-are huge mistakes. I know I'd spend money in FP stores, esp with a PCE, for new bags made for the great lines of the past. Locking out loyal customers from the FOS has also really been a bad move. Really bad.

I totally agree that Coach seems rather lost these days, and that makes me a little bit sad. There was a time when, for me, Coach seemed to be THE brand of bag to wear. I am still loyal to the brand, but I will be buying the older styles on eBay and Bonanza, or waiting for the semi-annual sales and keep stalking outlets and the FOS ( if I don't get locked out. ).
That surprised me too, but one possibility is that it's a combination of two things ----
1. the author's lack of interest in bags (ie. it is a man, and he probably doesn't take note of handbags being carried around him), and
2. the fact that since Coach is *offering* far fewer signature bags lately (at both boutique and factory store), maybe looking at just the raw numbers he saw a downward trend in signature purchases.
What I mean is, if Coach is offering less signature, then of course the raw data would show less signature being purchased. And maybe he's not interested in handbags enough to know, as we do, that Coach is simply offering fewer, whereas there's a heck of a lot of older signature bags walking around on ladies' arms. Hope that makes sense.

And yes, I agree with many comments above about removing PCE's and dropping so many from FOS as being a bad move. When I found these articles, I was trying to explain to my husband last night, that while the stock has been doing down, down, down for over a year now, some of their most remarkable moves have been: drop people from FOS (alienate many of those customers, "check"); do away with PCE (dissuade some/many of those customers, "check"); the great feather fob debacle (not as many people alienated with that one, since it was primarily just the TPF forum that knew how to order in the first place, but still, what a glorious display Coach put on while doing it ... I mean come on, turning UPS trucks around???? ; "check").

And while I admit I didn't feel up as much leather as I would have liked to, or probably should have, on my quick trip to the boutique last weekend, many reports *here* are that in the new Vevers stuff, the Rhyder leathers are thin, sticky, and plasticky (just quoting words I've seen tossed around here), and only the Dakotah leather is genuinely impressive for the price point. So those people that they *haven't* managed to alienate to some degree yet, ie. the ones they're trying to lure in, perhaps, from Gucci, Prada, Fendi, Chloe, Burberry, etc etc ... does Coach think those people simply won't notice the leather? Or, for that matter, that long time Coach leather fans won't catch on?

Disclaimer: I'm obviously not talking "everyone", I'm talking trends. But this is just turning into one thing after another. And yes, it's definitely throwing things against a wall to see what sticks. Again, I *am* a Coach lover. If you don't believe me, look at how many Willis's, Zoe's, Molly's, even Campbell's that I have. Coach was my first love back in graduate school, when a classmate and new friend of mine introduced me to her mother's love of classic Coach. I was star struck. .... And I do hope Coach can turn their stock around. But this is just getting painful (even macabre-ly comical) to watch. (Sorry for the rant. I don't usually rant. Climbing back down from my little box now.)
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GA Peach

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Sep 23, 2013
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Thanks for posting the articles. It's interesting to watch. I stopped by one of my area FP stores yesterday thinking there would be lots of people out to see the new floor set. I was the only person in the store with 3 SA's and no one else came in the entire time I was there, 20 - 25 minutes. The rest of the mall was busy for 3pm on a Friday.
 

stephan142

Member
Sep 15, 2013
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I guess that I'm one of the few people that love where coach is going. I used to love the siggys when I was younger but I grew tired of them with age. I also got tired of coach when it seemed that everyone from age 10 and up was carrying them. I was even considering saving for a pre owned luxury bag until I bought the Madison Carrie satchel. I love the fall collection and I really love the spring 2015 collection from what I have seen. I plan on getting at least 4 pieces this fall and I can't wait for the spring next year. I hope that coach can survive. If not, then I guess that I will have to move on up with the big boys, ie Louis and balenciaga. I probably won't move on to Michael kors because to me, his stuff is becoming real common. Everyone has at least one. Including me.
 
Apr 25, 2007
1,175
96
Plantsville, CT
Thanks for posting the articles. It's interesting to watch. I stopped by one of my area FP stores yesterday thinking there would be lots of people out to see the new floor set. I was the only person in the store with 3 SA's and no one else came in the entire time I was there, 20 - 25 minutes. The rest of the mall was busy for 3pm on a Friday.
Our mall store was very busy for a Friday late summer. It was great to see the excitement around new product. Half were looking and half were buying and pretty excited. I wish them well. Personally I want to own at least one of SVs bags. I think the Dakotah is worth every penny due to its workmanship.
 

Caledonia

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Sep 13, 2006
488
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First, I'm no fashion expert, just know what I see in my Vanity Fair ads each month (luxury,) vs. what I see in my Midwestern small-town pta, grocery, etc.(signature everything). They're completely different. It's like two completely different mindsets on what is "in" or "must-have." And from what I've ascertained here, it seems Coach is attempting to succeed in both markets. Just stretching themselves too thin. Used to be what was appealing to women in all demographics in all handbags was beautiful leather. By creating or giving in to the signature craze, it seems to have turned the brand trendy which is not the same as luxury.
 

Jadis4742

Member
May 24, 2013
811
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Northern Virginia
I really don't get why they are turning themselves inside out to be seen as 'fashionable' or whatever. Fashion changes. What bags really sell the best? Borough? Phoebe? Duffles? Ramblers? Beautiful, CLASSIC bags. I grew up with Coach bags being a classic, quality buy. I was so happy when I discovered FOS and could finally afford them. (Because some of us, through no fault of our own, will ever reach the financial status where multiple $500-$800 bags a year is feasible.)

Now ask people about Coach and it's all either "I hate siggy print" (from muggles) or "they're a hot mess right now" (from purse people).

And let's not beat around the bush. The new bags are 'inspired' by high-end designers. That's Steve Madden's and Michael Kor's job, Coach, not yours.

With the 90's revival and Normcore making a comeback, I really think if Coach decided to just accept their place in life, they would be much happier and on-trend. Continue phasing out siggy print of the FOS stores, if you must try to get rid of that aspect, and rebrand themselves as a classic again. Get rid of the weird, unhappy models and just have simple ads, women dressed all in black, all races, all ages, with an Aubrey Hepburn vibe, all holding a different, quality leather bag in a standout color.

(There, Coach, I just saved you a couple million in advertising costs, now be a dear and open FOS to everyone, please, and fix your mailing list issue.)