Coach Shutting Down Stores, Dropping Forecasts

Coach has made the first step toward recovery -- admitting it has a problem.

Jun 20, 2014 at 1:21PM

Yesterday Coach (NYSE:COH) announced that it was going to incur some extra charges over the next few quarters. The handbag maker is going to have to buy a used pickup truck and a bunch of 2x4s so that it can drive around the country and board up about 70 of its retail locations. If you see the truck in your neighborhood, look out for Wilbur the Coach dog -- he's a biter.

Closing down shop
Coach currently operates 543 stores in North America, so the 70 closings will account for 13% of its total store count. The market reacted by dropping the company's stock 10% as of midday today. Coach said that the sands of retail had shifted under its feet and it had failed to respond. That shift is largely a reflection of the dominance that Michael Kors (NYSE:KORS) has had over the last few years.

In order to try to rebuild its North American foundation, Coach has to pull back into itself and consolidate some of its strength. Last quarter, North American comparable sales fell 21%, dragging the whole business down like dress shoes on a swimmer.

As Coach kicks vainly against the tide, Kors is cutting through the water like a shark. Last quarter, Kors increased comparable sales in North America by 20.6%. The brand is just ripping market share out of Coach's hands, and yesterday's announcement is evidence of Coach's inability to move quickly enough in its reaction. The closings are going to cost Coach between $250 million and $300 million over the next few quarters. Apparently it takes more than just boards and a dog to shut down 70 stores.

Will it stop the bleeding?
Coach is in a reactive mode right now, fighting against a situation that others have put it in. Kors, on the other hand, is in control of its business, making the market into the kind of market that works for it. That means that Kors is the company that can introduce new lines to drive new sales and can dictate what people think is trendy.

By closing underperforming locations, Coach is hoping that it can focus its resources on regaining the top spot in handbags. By cutting its losses, the company will have more resources to move into opportunistic markets, won't have to discount as heavily to get business in difficult areas, and can cut back on some operational costs.

Given the strength of Michael Kors -- and others -- Coach still has a long way to go to get back to stabilization. The company waited too long to accept the inevitable, but this is clearly a step in the right direction. Even though the stock fell, this seems like one of the best signs yet from Coach. It has finally recognized its problem and is doing something meaningful to address it. The next year and a half is going to be very interesting.

Handbags are so yesterday
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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and 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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