Handbag maker Coach (NYSE: COH ) posted results from another dismal quarter of falling sales and profits that shows its performance is not only going from bad to worse, but is accelerating as it falls. No doubt the inroads made on its North American market share by rivals Michael Kors and Kate Spade have played a role in this decline, but the underlying root cause of its demise may be a result of actions it's taken all on its own.
In its fiscal third quarter, Coach reported global sales of $1.1 billion, down 7% from the year-ago period, with revenues from its North America division plunging 18% to $648 million. Worse, comparable sales in the segment -- those from stores open at least a year -- plummeted 21% for the third quarter in 2013, an extremely severe deterioration that shows no signs of abating.
Sure, if you want to be the glass-is-half-full kind of guy, you can look at the 25% increase in sales in China and the continued improvement in Japan, where revenues rose 10%, and say it's not all bad. Yet as much as the Asia-Pacific region is becoming increasingly important to Coach's future -- if for no other reason than it helps offset the dramatic losses here at home -- North America still accounts for 59% of its revenues and it can't abide any further wasting away of that business or else it will simply become a very diminished company.
But if you want to look at the real culprit for the situation, don't look at Kors, Spade, or any of the other rising fashion brands that are grabbing the consumer's attention. Instead, look at the executive suite of Coach, because conscious decisions it made in positioning the brand have led to the handbag maker's downfall. And if it doesn't change course, it may ultimately lead to its demise.
Last year, Coach very publicly decided to go from an aspirational luxury handbag and accessories maker to a "lifestyle" brand selling trinkets that might be more appropriate for a collection from Kim Kardashian than the confident, upwardly mobile female customer that used to shop its stores. Not only did it begin selling more clothes, jewelry, key fobs, perfume, and shoes, but it also subtly changed how it viewed itself and how it described its business to the world.
No longer was it "a leading marketer of modern classic American accessories," but now it was one featuring "modern luxury accessories." The difference is important. It used to be a brand for the woman striving to arrive; now she's already apparently made it, but did so on the cheap. I don't think it's just coincidence that Coach's free fall from grace at terminal velocity last year occurred at precisely the same time these changes took effect.
Both revenue growth and comps fell off the table right after Coach changed its vision, with the consumer loudly rejecting the makeover. I think it's also telling that global luxury designer Reed Krakoff left the handbag maker and took his brand name with him at exactly this moment, almost as if he didn't want to be tainted by the new image.
Coach, in general, was trending down for the past few years, undoubtedly reflecting the rise of competition, something that by itself isn't especially worrisome. As newly public brands going up against a staid stalwart, Kors and Spade gained a certain cachet with consumers and left behind their previously favored brand. In the fashion world, "familiarity breeds contempt" is part of the industry's DNA. But in attempting to reverse the decline, it worsened the rift by cheapening the brand, thus accelerating the effects.
Investors can cling to hope that narrowing its product line and further cost containment will also contain the damage, but Coach has no one but itself to blame for this predicament and, unless it reverses course, I believe this won't be the worst we'll see.
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