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Will The Coach Transformation Plan Work?

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Updated

Rebranding and transformations

As mentioned in previously in this series, Coach, Inc. (COH) is currently in transformation mode. The company is refreshing its brand image to secure an “effortless New York style positioning.” It’s also marketing more aggressively in print media.

In keeping with this same transformation plan, Coach is holding back on preferred customer events at stores including Coach days in Q1 2015. It’s also returning to the semi-annual sales model followed by most luxury fashion brands. Fewer promotional sales are intended to improve the top line, improve margins, and maintain brand value.

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New collections

An excess of promotional events means more customers will wait, rather than pay full price for new collections. Now more than ever, this is to be avoided. The company rolled out collections by new creative director Stuart Vevers in fall 2014. And Coach is banking on these new collections to revive its fortunes.

Sales impact

Fewer in-store promotions has meant less foot traffic, both in the first quarter of 2015 and in the critical Thanksgiving to Christmas period. In 1Q15, the company reported that the average value of retail sales and transactional value had increased due to less promotional activity.

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Bucking the trend

With all its promotional cutbacks, Coach appears to have bucked the trend in fiscal 2015. A survey conducted by BDO USA during the Thanksgiving weekend revealed that most retail chief marketing officers, or CMOs, focused marketing dollars on promoting flash sales and daily deals. According to eMarketeer, the percentage of CMOs focusing on such promotions rose from 5% in 2013 to 34% in 2014.

Holiday sales

Other data sources also suggest that promotional activity this holiday season started earlier and lasted longer. Discounting activity has also been heavier. This is perhaps one of the reasons why we might see negative sales growth for Coach in the second quarter.

Outlook

Going forward, Coach will have to balance its need to rebuild its brand with the realities of a cut-throat and discount-seeking market. Coach has lost market share to newer entrants Michael Kors (KORS) and Kate Spade (KATE). However, in mid-2014, both KATE and KORS reported slowdowns, citing a difficult retail environment.

In this environment, Coach’s bet on its brand premium is a risky call. Particularly while it continues to expand its factory outlets in North America, which mostly retail older products at discounted rates. This seems to contradict the company’s margin expansion targets. At least, it may not be the way to lift margins to the 30%+ levels seen a few years ago.

A lot is riding on the success that new creative director Stuart Vevers is able to bring to the beleaguered company’s image.

Coach is part of the Consumer Discretionary Select Sector SPDR Fund (XLY) and the iShares S&P 500 Value ETF (IVE).

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