In the grand scheme of things, the beating Coach(NYSE:COH) stock took earlier this week could have been worse. With revenues down 15% and earnings per share cut nearly in half, the 6% drop in its stock price might not seem so bad.
CEO Victor Luis says he is happy with how the company-wide transformation into a provider of modern luxury goods is progressing -- "we continue to gain traction on this strategic plan to reinvigorate growth and drive the Coach brand's relevance." Others might be more skeptical, but here are five takeaways management wanted shareholders to keep in mind.
1. Giving up promotions is crushing our North American business
Coach began to scale back promotional activity last year in an effort to protect the brand -- those efforts accelerated this time around. In the third fiscal quarter, the company:
- Held only two flash sale events per month compared to three flash sale events per week last year.
- Held just one invitation-only customer event in mid-March, around spring break.
- Had no Coach Days in any North American department store during the quarter, compared to an average of approximately 30 such days a year ago.
The financial results showed what that strategy wrought. North American sales fell 24% to $493 million on a 23% decrease in comparable-store sales. The change in the cadence of flash sale events alone pressured comps by 11 percentage points and negatively affected conversion, the number of customers who actually bought something after entering a store.
You cannot even blame the 56 store closings in the quarter for the reduced revenues. They were among the smallest, worst-performing locations, so their contribution was negligible.
However, Luis believes all of this is a positive development as brand tracking surveys "showed further improvement among category drivers that Coach was perceived as less promotional, while our brand affinities remain strong overall."
2. International growth has weakened considerably over the past 12 months
Growth in foreign markets may be the one bright spot in an otherwise dismal earnings report, with sales up 4% overall after backing out the strong U.S. dollar and unfavorable exchange rates.
In China, sales were up 10% in constant currency, with positive comps, while sales at owned-stores in Asia and Europe were also higher. It did experience an 11% constant currency decline in revenues in Japan, but that is due to a difficult comparison to the year-ago quarter when a planned tax hike drew sales forward.
Still, although international sales managed to stay above water generally, growth was down considerably from last year. In China, sales had been up more than 25% the prior year, while Asia and Europe sales were described as "robust."
International markets account for a third of total sales, and even Luis was forced to recognize that they may weaken further, particularly in the key Chinese market. "We expect that there will likely be continued volatility in the near term due to both macro issues and geopolitical events, which are impacting trends in China and some key tourist markets."
3. Becoming a modern luxury brand prices us above our traditional customer
While Luis says the pricing strategy has always been tailored to the local currencies of its global customers, the inexorable winnowing of lower-cost products in favor of pricier items is turning customers away.
Two years ago, handbags priced at $400 and above accounted for around 16% of total handbag sales. Last year, that rose to 23%, and in the third fiscal quarter, they accounted for around 30% of total handbag sales. While that has led to an increase in the average ticket size, it was offset by lower customer traffic.
But Luis says Coach will stay the course. "We aim to be approximately 40% to 60% below our traditional luxury competitors, and at this time we do not have plans to change our strategy."
4. Hopefully our footwear acquisition will kick-start growth
As the Stuart Weitzman acquisition prepares to close next week, the company made up virtually all of Coach's footwear offerings in its retail stores and about a third of the products at its outlet stores. Coach says men's footwear was also well received.
The Weitzman collection has also struck a chord, and coupling that with the two-year renewal of a license with Jimlar, a women's footwear specialist, Coach is expecting there to be significant upside in both its domestic and international stores. In particular, it hopes to use the Weitzman name to expand the brand into its own line of handbags and accessories.
The payoff from the acquisition, however, will have to wait until next year. CFO Jane Hamilton Nielsen said they expect "the Stuart Weitzman business to be accretive from year one of transaction related charges, including anticipated purchase accounting adjustments and contingent payments related to the transaction."
5. Our conversion to a lifestyle brand continues
Whether a footwear brand should ever have a perfume is open to debate, but Coach's own efforts at brand extension remain ongoing, though it is changing horses midstream when it comes to scents.
Coach currently has a licensing agreement with Estee Lauder, but upon its expiration, it will be switching to Inter Parfums, a perfume maker well-known for helping brands develop their own scents. Among its clients are Abercrombie & Fitch, Banana Republic, bebe, and Jimmy Choo -- it turns out some shoemakers can have a pleasant odor.
That is also a benefit investors will have to wait on, though, as Luis says Coach "expect(s) to launch our first scent with our new partner in the fall of 2016."
What it means for investors
All of the above shows that while the fiscal third quarter earnings results were distressing, Coach will continue to leave behind the customer that has carried it across the decades, the consumer who aspires to affordable luxury. Instead, it hopes to attract a more well-heeled customer by giving them a discount.
Investors should be wary about how far Coach shares have come since the strategic shift and how little the market has taken back in the face of such challenging results.
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