To celebrate the holidays, we here at the Fool are devoting extra virtual ink to all things consumer-focused in a special section called "The 12 Days of Christmas." Over the coming week, we'll have our "12 Days of Content" surrounding consumer-focused names that look set to profit or perish from the holiday cheer.
Saving face in tough times is a particularly dicey exercise for luxury retailers. When brand prestige is your currency, an ill-conceived, short-term, budget-minded makeover can lead to long-term brand destruction.
Given the high stakes in the high-end market, it's all the more impressive how well Coach (NYSE:COH) has held up these past two years. The premium handbag and accessories giant has fared well compared to other luxury-goods retailers like Nordstrom (NYSE:JWN) and Saks (NYSE:SKS). Coach's gross margin for the most recent quarter is holding steady at 72.3% -- down from the highs of a couple of years ago, but on a nice rebound from earlier this year.
Same-store sales in North America suffered but a scuff -- down just 1% -- a number that compares favorably with the comps posted by Wal-Mart Stores (NYSE:WMT) and Target (NYSE:TGT), but falls well short of the stunning 7% comps that TJX Companies (NYSE:TJX) posted in its latest quarter. Retail laggard Abercrombie & Fitch (NYSE:ANF) posted fantabulously awful -11% same-store sales.
Coach remains the little black dress of the accessories market. Translation for the fashion-challenged: It's the quintessential wardrobe staple -- the timeless standard you confidently reach for year after year after year. For a closer examination of the company's recent financials, see "3 Big Reasons to Buy Coach."
When Coach's stock price was getting pummeled (it was trading in the low teens as recently as March, compared to the mid-$30s right now), investors would have done well heeding two essential fashionista rules:
- The classics never go out of style.
- Be patient, because eventually everything goes on sale.
The man with a plan
Like the products it peddles, Coach is built to withstand rigorous wear and tear. Before the carpet was yanked from under the economy, the company already had a recession strategy ready to roll.
Leading the brand through good times and bad is 30-year company veteran Lew Frankfort, who has been at the helm as chairman and CEO for the past 14 years. Under Frankfort's direction, Coach underwent a whirlwind stateside merchandise makeover -- its "Poppy" handbag line is priced for leaner times, and now about half of the handbags it sells are priced at less than $300. Frankfort also kept future growth at the top of Coach's "to do" list, cultivating the clamor for Coach goods in Asia by expanding efforts in China and Japan. Last quarter, the company added five stores in China and announced plans for an Asian distribution center.
Motley Fool Stock Advisor senior analyst Andy Cross and I spoke with Frankfort about the secrets of seeing a legacy brand through good times and bad. Today, as I review the transcript, his comments seem as relevant as ever.
So in honor of the 12 Days of Christmas, here are seven of the secrets behind Coach's success that Frankfort shared with us.
Lesson No. 1: Know thy customer really, really, really well.
We conduct interviews literally with many tens of thousands of consumers individually around the world each year so that we can understand their attitudes, their likes for products, and even in the product-development process prior to going into production on major collections. The bulk of our research is through the Internet, and it is geared to understand attitudes toward the brand, toward the category, toward the economy, and to understand what trade-offs they make.
We are very mindful that innovation is critical, relevance is critical, as is the whole price/value relationship.
Lesson No. 2: Know where your product fits in the customer's universe of purchases.
In our full-price North American stores, 75% of our sales are for self-purchase and 25% are for gifting.
Putting the self-purchase in context, we estimate apparel accounts for 55% to 60% of a woman's wardrobe expense; accessories are 10% to 15%, footwear 10% to 15%, and jewelry is 10% to 15%. In this decade, women are using accessories in a more prominent way to update their wardrobes for a lot of reasons, including deflation with women's apparel.
The reason why the category enjoyed such phenomenal growth during this decade is not because consumers spent a greater amount on their wardrobe. It is because they reallocated their wardrobe to spend more on accessories.
Lesson No. 3: Make the entire retail experience reflect the brand values.
We think of ourselves -- with the breadth of our product offering and the different consumers that they serve -- as the 21st-century replacement for the local handbag branded store from the 1950s and '60s, before the department stores put them out of business. That is the visual reference for us.
Strategically, as we get larger as a brand, we decided that we also need to become more intimate with consumers. To do that, you'll notice that our retail environment is more cozy, more intimate and residential-feeling. Since we provide consumers with a great product that comes out of the finest materials at a very attractive price point, the environment is luxurious -- understated, but nevertheless luxurious -- with a very high service component.
Lesson No. 4: Don't delay dealing with a potential downturn. Act quickly and decisively.
We were not surprised by the economic downturn. The severity, obviously, was unexpected. This is an unprecedented environment in my 30 years with Coach. But in January '08, we indicated publicly that we were in a consumer recession -- and three months earlier, we began to plan for it.
We knew that the best way a quality brand like Coach with a strong franchise could respond would be to wow our consumers. We gave ourselves a mission of compressing multiple years of product innovation into one year. So, to be more graphic, what we said was that when consumers come into our stores in December '08 for the holiday, we wanted it to look as if it was 2010 instead to contrast it to how we looked in 2007. We liberated our designers and gave them an opportunity to work with a broader range of materials in different combinations
Lesson No. 5: You needn't reinvent yourself to succeed overseas.
There has been a globalization of consumers. In Japan, we have seen a coming of age -- an emancipation -- of the younger woman: She is marrying late, if at all, and only having a little bit over one child on average. She is much more shaped by cultural values globally -- the world of digital communications, the Internet, through travel -- than she is by the values that come from her parents' household. She is a consumer that is looking for innovation and relevance and value. The consumers in Shanghai and Tokyo and New York and Washington frequently have more in common than the consumer who might live in Iowa.
Lesson No. 6: Tastes evolve, and so must your brand.
[From the beginning,] we saw ourselves as a brand that potentially could be a mirror of America, in terms of being a democratized luxury brand. We have prided ourselves on building lasting relationships with consumers, and most of our consumers stay with us for a lifetime.
We launched a new logo collection with the intention now and in the seasons and years ahead to give us a second major logo platform. It is more sophisticated and lends itself to softer, drapier bags, and will appeal to a consumer who either has not purchased our signature logo or has graduated from it.
Lesson No. 7: Never let an opportunity for a sale slip by. Lew's closing words of the interview ...
Think Coach when you think Christmas!
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