To say that Coach's (NYSE:COH) 2014 stock performance has been difficult seems to be an understatement. Since the beginning of 2014, COH's share price is down over 40% and has been repeatedly hitting 52-week lows since early May 2014. While COH is struggling at the moment, let us look at some of the details of COH's branding "reset" activities. The details of such reset are beginning to emerge in advance of Stuart Vevers' new Fall/Winter 2014 collection. Mr. Vevers is COH's new designer in charge of all creative aspects of the COH brand.
Background - June 2014 Analyst Meeting
At COH's June 2014 analyst meeting, the company announced they were closing about 70 of their underperforming North American store locations during fiscal year 2015. While COH closes underperforming stores, they will invest in their flagship stores in 12 major metropolitan areas such as Paris, Milan, Sydney and Melbourne. In addition, COH instituted a semi-annual sale schedule (similar to what most luxury brands have been doing for many years) focused around the holidays to curb the brand dilution that results from too much promotional activity. COH also stopped selling their merchandise on third-party flash sales sites and limited access to their own online flash sales channel.
At the heart of COH's branding reset is the concept that COH's products define "modern luxury" as opposed to the "accessible luxury" that COH's products currently embody. Such concept is not about copying European luxury houses or raising product prices, but rather emphasizing COH's quality, craftsmanship and the lasting relationships COH has established with consumers. The most significant changes will be in COH's North American women's accessories business where COH admits they failed to keep up with changes in the market. Globally, COH considers China and Japan their two most significant growth opportunities outside of the U.S. In China, consumers are shifting their buying priorities and becoming less focused on luxury brand names and more focused on quality products.
COH will emphasize leather in their products as opposed to the "C" logo. Some COH signature design details will carry over into the new bags including the metal turn lock closure, hang tags and the horse and carriage logo (which is a universal symbol that is especially powerful in non-English speaking countries such as China). COH will emphasize a mix of COH's heritage with New York style. The new Coach offerings also aim to balance craftsmanship with functionality, while appealing to a new, younger and altogether more fashionable customer.
COH will also be changing their pricing strategy. Some of COH's current best-selling bags are more expensive than most of their product line, such as the Weekend Borough Bag at $1,200. COH is acknowledging the demand for their more expensive hand bags by reducing their product line of bags to about 100 models. As such, a greater share of their offerings will be "up market." COH will keep the prices of their higher priced products below those of Louis Vuitton, Burberry and the highest-end luxury companies in Europe. The European luxury companies predominantly sell to the wealthiest customers. As a result, there is a lack of companies serving customers looking for a $600 to $1,200 bag. Some commentators, however, believe that "Coach's pricing shift seems less like a bid for new buyers than an attempt to assure its current customers that the brand still confers status."
COH will begin their advertising campaign in September 2014. For the upcoming advertising campaign, COH hired Stephen Meisel, one of the most successful and renowned fashion photographers in the world. COH also replaced famous models they used in previous advertising campaigns with up-and-coming models. Further, the advertising campaign will emphasize New York City as part of COH's identity and where the COH brand began over 70 years ago in a New York City loft. Ultimately, the new COH advertising campaign will emphasize that COH is a brand of quality, leather and craftsmanship.
COH has already received support from major fashion retail partners including Colette in Paris, France and Net-a-Porter (the world's premier online luxury fashion retailer). COH's fall ready-to-wear offerings have already made their debut at Colette, almost two months before any other retailer. In addition, the COH Fall/Winter 2014 product line debut at Colette will be celebrated with two exclusive COH Ryder bags available in limited-edition styles. Net-a-porter will start selling COH's Fall/Winter 2014 collection in August 2014. After these initial debuts of COH's Fall/Winter collection, the new collection will be available around the world in September 2014.
COH competes with multiple companies in the hand bag space. Michael Kors (NYSE:KORS) and Kate Spade (NYSE:KATE), however, are thought of as COH's primary competitors. COH effectively created the affordable-luxury hand bag market years ago. As KORS and KATE became increasingly successful competitors, COH, by their own admission, failed to continue to innovate and increasingly relied on discounting to increase their sales. Discounting has damaged COH's brand in the North American market in particular.
KORS, considered COH's primary competitor, has attracted negative analyst coverage recently. Some analysts believe that recent price cuts for KORS more upscale products are raising concerns that the maker of premium hand bags and accessories may be losing its "luxury halo." Those analysts continue to see the risk of brand dilution from KORS' large North American wholesale distribution network. As concerns about KORS' discounting increases, some analysts are lowering price targets for KORS stock, already about 20 percent off its 52 week high. The change in opinion of some analysts in regard to KORS from just a few months ago was so swift, a Barron's article recently featured a headline mocking such a rapid change in opinion. There are commentators that are even forecasting an imminent crash in KORS' stock price.
We cannot stress enough that COH is traversing through difficult times. That said, COH has been planning almost a year in advance for this moment. While we are certainly not fashion experts, COH's branding reset plans sound well thought out and likely to put COH on the road to repairing their brand. Our summarized understanding of COH's plans is as follows: 1) reduce discounting and over reliance on outlet sales; 2) emphasize COH's quality, craftsmanship and the lasting relationships they have established with consumers; 3) adapt to changes in the North American women's accessories business; 4) pursue opportunities in China and Japan which COH considers their two most significant growth opportunities outside of the U.S.; 5) emphasize leather in their products as opposed to the "C" logo; 6) retain some COH signature design details in their new bags including the metal turn lock closure, hang tags and the horse and carriage logo; 7) emphasize a mix of COH's heritage with New York style; 8) aim to balance craftsmanship with functionality, while appealing to a new, younger and altogether more fashionable customer; and 9) reduce their product line of hand bags and increase their share of higher-priced affordable luxury models to address a market above much of the average prices of the affordable luxury market but below the European luxury product maker prices.
With COH's earnings announcement coming up in early August 2014, we recommend that conservative risk-averse investors wait until after earnings are announced to establish a position in COH. Although COH telegraphed their earnings for the coming year in their June 2014 analyst meeting, it is difficult to predict how investors will react to the next earnings announcement. The last few earnings announcements by COH have been met with severe sell-offs of COH shares. Currently, there are some options traders betting that COH's share prices will head even lower in the near future. We continue to believe, as we stated in an earlier article on COH, that 18 months from now COH will prove skeptics wrong and reward investors. In fact, we believe that an investment in COH today will outperform an investment in highly-priced KORS shares over such 18-month period.
Disclosure: The author is long COH. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.