Here's Why Coach's Chinese Bastion Is Under Threat

Luxury retailer Coach (NYSE: COH  ) has lost its wheels in 2014, while competitors Michael Kors (NYSE: KORS  ) and Kate Spade (NYSE: KATE  ) are chugging along nicely. Coach's bad times started when the company declared disappointing second-quarter results in late January. Its North American comps declined 13.6% while its overall revenue dropped 6%.

Coach could not escape the adverse climate conditions that prevailed in the U.S., while competition from Kors and Spade also throttled its growth.

Challenges in China
China was the only bright spot for Coach; its total sales in the region grew 25% and its comparable-store sales rose at a double-digit rate. The company opened 10 new stores at key locations in China: two in Hong Kong and eight in mainland China. Coach now has a total of 142 stores in China, with 122 stores on the mainland. In addition, it is positive about its prospects in the rest of the Asia-Pacific region, where it is opening stores in Taiwan, Singapore, Korea, and Malaysia.

However, Michael Kors is catching up fast in these regions. Kors now has 94 retail locations in Korea, Greater China, Southeast Asia, and Australia. In addition, Kors recently opened a new flagship store in Shanghai. This is Kors' largest location in China at approximately 5,800 square feet, and the company believes that it will become the premier destination for the Michael Kors brand in China. In the long run, Kors plans to have 200 retail locations in the Asia-Pacific region. 

This could be a worry for Coach since Michael Kors is a fast-growing company in China's affordable-luxury segment. Kors focuses on 20-to-30-year-old shoppers in China, and it plans to grow its footprint to 100-125 locations in the country over the next three to five years from just 12 last year. Michael Kors is also making its presence felt in the e-commerce space in China. It was the most sought-after American brand among Chinese Internet users according to the Digital Luxury Group in 2013. Also, Kors recruited five of China's top models last year to promote its products as it makes a push into this fast-growing region. 

Kate Spade enters the fray
Even Kate Spade looks to make a mark in China. The company will open eight to 12 stores in China this year, adding to its existing network of 20 boutiques. Kate Spade recently opened a new headquarters in Hong Kong to oversee its expansion in this area as it looks to benefit from one of the fastest-growing fashion-apparel markets in the world. 

In fact, Kate Spade is preparing to open a new international flagship store in Tokyo as well to tap the Japanese market. This way, the company can capitalize on Coach's troubles in Japan. Coach's sales in Japan dropped 21% in the previous quarter, mostly due to a weaker yen. However, in constant-currency terms, the decline was less pronounced at 2%. 

Coach has 196 stores in Japan, which include 149 full-value stores and 47 factory locations in approximately 30 outlet malls. While this is a big network and Kate Spade is nowhere near this as of now, the good news for Kate Spade is that Coach didn't open any new stores in Japan in the last reported quarter. Going forward, Coach doesn't have lavish plans for this region, although it expects its net square footage to grow slightly with the openings of some dedicated men's stores. 

Bottom line
Clearly Coach has fallen upon tough times and the company faces challenges from fast-growing competitors. In addition, in North America, Coach is already on the decline, and this complicates matters further from a long-term point of view. So considering all of these points, it looks like investors may want to stay away from Coach for now and see if the company can get its growth back on track going forward.

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