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Costs And Profitability At Coach

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Coach’s profit margins

Margins at premium handbag and accessories maker Coach, Inc. (COH) used to be among the best in the retail (XRT) (RTH) industry. But there’s been a decline in profitability in recent years. A number of the company’s actions have contributed:

  • pushing lower-priced products since the onset of the 2008 Great Recession
  • lowering prices to counter deep discounts and fresher designs by new rivals Michael Kors (KORS) and Kate Spade (KATE)
  • having frequent flash sales via its websites and Coach days at stores
  • building an excess of inventory as rivals ate into its market share, as we saw in Part 4 of this series

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Transformation plan

Prior to 2012, Coach’s profitability was ahead of its peers. It was also the market leader in the affordable premium handbag business. Since 2012, margins have declined while rivals Michael Kors (KORS), Tory Burch, and Kate Spade (KATE) have gained market share at the expense of the beleaguered brand. At the end of fiscal 2014,[1. Fiscal year ending June 28, 2014] the company announced a transformational plan to return the handbag maker to “a place of best-in-class profitability and sustainable growth.”

Cost-saving measures

To implement the transformation plan, Coach intends to incur $250–$300 million in pre-tax expenses, mostly this fiscal. The money will be used primarily to increase inventory investment, pay out severance costs related to store closures, and to cover impairment charges and higher depreciation costs. As a result of this spending, Coach expects to save $70 million this year and $150 million annually in subsequent years.

Coach is also looking at tilting its sales mix toward higher-priced handbags and reducing the number of discount events at its stores and on its e-commerce sites. These initiatives would also help improve margins for the retailer.

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