Did Coach Just Say It's Game Over?

The handbag maker looks like it's throwing in the towel and not even trying anymore

Jun 10, 2014 at 3:15PM

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Accessories manufacturer Coach (NYSE:COH) looks like it's throwing in the towel, giving up any pretense of trying to make it to the buzzer. After steadfastly avoiding the risk of cheapening its brand by refusing to run sales, the handbag maker says it will relent and run two big sales a year, one in January and one in June.

While this is a recognition of the fact that its faltering sales program has been unable to keep pace with newer, more vibrant competition from the likes of Michael Kors and Kate Spade, and Coach does need to try something beyond just introducing new styles to get customers into its stores, it also leaves investors wondering when the "blue light specials" will start appearing.

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Source: Coach SEC filings.

There are indeed many luxury brands that do discounting, and Coach says all it's doing is bringing its North American business in line with both the industry and what the retailer itself does abroad.

The times are indeed changing, and luxury retailers that previously disdained selling their goods online to maintain an air of exclusivity now find e-commerce sites a benefit. Designer Tom Ford used to prohibit photographers from photographing his runway lines for fear they'd appear online, but now operates his own online store and, according to Bloomberg Businessweek, views it as "a major new avenue for our future growth."

A couple of years ago, Hermes and Cartier allowed products to appear on discount site Bluefly, on which Chanel, Gucci, Marc Jacobs, and Prada also appeared; then earlier this year Hermes again broke new ground and held its first-ever sale in China, soon followed by Ferragamo, Boss, and Armani. So it wouldn't be unprecedented for an aspirational luxury brand like Coach to follow suit, but that still doesn't mean it's a good idea.

Tiffany (NYSE:TIF) is a cautionary tale of what can happen when you try to drum up sales by going after the lowest common denominator. Several years ago it introduced a low-cost line of silver chains and bracelets that every mall rat was able to buy, and while this did boost sales, it also ate into margins and eroded the cachet associated with its brand. It was forced to backpedal and raise its prices to maintain its exclusivity.

Coach similarly risks its brand cachet by going the lowbrow route, something it's already treading close to doing with last year's decision to transform itself into a "lifestyle" brand, something you might associate with an Orange County housewife rather than the confident, upwardly mobile consumer it used to attract. Heck, freakin' Burger King is repositioning itself as a lifestyle brand! Maybe shoppers can pick up a Whopper with their Coach keychain fobs.

To be fair, Coach does have off-price factory outlet stores, so consumers could already find discounts, and on occasion the accessories maker did mail out 25%-off coupons to customers. Yet the handbag maker also jeopardized its overall performance when it started manufacturing goods specifically for the outlets rather than just having its unsold goods shipped there. Doing so undercut its namesake stores and now the new sales policy will further erode the foundation on which they're built.

Despite the change to lifestyle styling, Coach remains an aspirational luxury brand, so maybe the discounts will be appreciated by its customer base and ultimately attract more buyers to its stores. Or, as I think more likely, it will be viewed as just another degradation of the value its handbags and accessories once held and will be bypassed by consumers heading off to pick up a Michael Kors or Kate Spade bag.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Coach, and Michael Kors Holdings. The Motley Fool owns shares of Coach and Michael Kors Holdings. 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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