Happier Shoppers Won't Solve Coach's Problems

Yesterday's announced rise in U.S. retail sales is welcome news to companies like Gap and Coach, but it's not enough to get them out of trouble.

Apr 15, 2014 at 5:15PM

According to the Commerce Department, retail sales grew by 1.1% in March, and in February, they grew by 0.7%, more than initially proposed. According to my wife, I shouldn't eat that cheese -- it's gone bad. Getting back to retail sales, the March result was slightly higher than analysts had predicted, leading to an odd sort of euphoria among observers. One economist said, "The consumer came in like a lamb and went out roaring like a lion." Maybe a little strong.

While the highest of hopes may not yet have come true, what's undeniable is that the trend is looking better across the whole retail sector. After a winter of weak sales and depressed margins, reports are now showing an increase in confidence and spending across the U.S.

All signs point to maybe
In addition to the March sales report, the newest consumer confidence report also showed an improvement in expectations. Consumers are reportedly looking forward to a better tomorrow, although they still believe that incomes are going to remain slow to grow.

Income growth has been the sticking point for many retail brands, with customers holding on to their spare cash in the expectation that no excess is going to be coming their way in the near future. That's had implications across the spectrum. For instance, Gap (NYSE:GPS) and teen retailers in general have been hit when back-to-school and Christmas roll around, cutting prices to entice parents into spending their hard-earned cash.

On the higher end, businesses like Coach (NYSE:COH) are failing to bring in new customers as their brands show wear and tear. Instead, only the hottest aspirational brands are able to pull in big groups of new shoppers. During its last conference call, Coach pointed to the drop in foot traffic as one of the biggest contributors to its weak numbers -- North American comparable sales fell 9%.

Economics alone won't save the world
In the interest of full disclosure, maybe economics alone would save the world -- I'm not sure. What I do know for sure is that Gap and Coach can't just wait it out. Both brands need to keep their image sharp if they want to compete. Gap has been losing ground to trendier retailers like Urban Outfitters' Anthropologie brand.

Gap's comparable sales fell 6% in March, highlighting the brand's current problems. What Gap needs is a little shine on its shoes. The company is still riding relatively high, having reworked its entire business over the last year and a half. It now needs to find a way to keep the ball rolling. For its part, Gap is optimistic about the rest of the year, and even with its shortfall, it felt comfortable reaffirming its full-year earnings-per-share guidance.

Coach is in a tighter spot, with a longer and deeper slump. Branding has been a real problem lately, with Coach unable to sell its main message. Instead, it's been focusing on international expansion and its men's line. Those have done well, with men's sales increasing by close to 20% last quarter. But it's left Coach's core customers feeling left out, and they've moved on to brands that are focusing on them instead.

The bottom line
A positive turn in our perception of the economic condition is good news, generally. For Gap, it's probably going to help bring the business back to level, as the company has a strong enough brand and a dedicated enough fan base. For Coach, it's still good news, but there's more work required to make the turn from bad to good. While Gap can fall back on the brand strength that it developed recently, Coach needs to stop the brand-bleeding before it sees a big bump from any general economic turn for the good.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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