Coach Inc: Is its Advantage in

Coach Inc: Is its Advantage in Luxury Handbags Sustainable

Introduction
Coach is a specialty retailer focused on providing premium everyday accessories in an assortment of styles and materials. Its products include handbags, wallets, watches, footwear, glasses, scarves and other leather accessories. Although nearly 60% of sales come from its roughly 300 U.S. retail stores and more than 100 outlets stores, Coach also sells its products through department stores, international shops, the interned and its catalog (http://www.morningstar.com/).
Coach, Inc. sells its products through company operated stores in North America, Japan, Hong Kong, and Macau; the internet, and the Coach catalog as well as through indirect channels, such as department stores in North America, international department stores, freestanding retail locations and specialty retailers. As of December 27 2008, the company operated 324 retail stores and 106 factory stores in North America, and 155 locations in Japan as of December 27, 2008 (http://www.morningstar.com/).
Coach, Inc has experienced tremendous growth with annual revenues increasing 28% on average during the last five years. Despite its fast track to over $3 billion in sales, future growth opportunities remain for Coach. Even though the company is slowing down the growth of its stores in the near term in an effort to be prudent in this weak economic environment, plans still exists to expand its stores base in North America over the long term, with a target market of around 500 stores (http://www.morningstar.com/) .
Coach has carved out a niche in the fast growing premium accessories market with its accessible luxury handbags. Coach fills a void between moderate brands and designer label with its high-quality, smartly priced goods. Coach’s brand positioning differentiated product offerings, and controlled distribution provides comfort that the company will weather this difficult retail environment. This challenging economic environment will pressure near-term sales and profitability, expansion abroad and continued product innovation will be key drivers of future long-term success for Coach (http://www.morningstar.com/).
Coach’s channels of distribution include direct-to-consumer channels and indirect channels. Direct-to-consumer channels include full-priced and factory stores in the United States (U.S.), internet sales, catalog sales and stores in Japan. Wholesale accounts with department stores in the United States and in international markets outside Japan represent the company’s indirect sales. The company’s wholesale distribution in international markets involved department stores, freestanding retail locations, shop-in-shop locations, and specialty retailers in 18 countries (Thompson, et al pp C-110).
Financial Analysis: 1999 to 2006
Income Statement
From 1999 through 2006, Coach experienced tremendous revenue growth. In 1999, the company generated $501 million in revenues which rapidly grew to $2.112 billion by 2006 (Thompson, et al pp C-101). Coach’s rapid growth during this period can be attributed to the design process developed by Creative Director, Reed Krofoff who believed that new products should be based on market research rather than instinct. To this end, Coach began conducting extensive consumer surveys which resulted in the launch of new collections every month rather than only two collections per year previously. In addition, the company revamped the look of their stores to a brighter, airier ambience which proved more appealing to customers (http://www.morningstar.com/).
Gross and operating margins have widened over the years. The company’s gross profit margin has widened from 55% in 1999 to 78% in 2006 from outsourcing production which resulted in lower cost of goods sold. Operating profit margin improved from 3% in 1999 to 46% in 2006 as well benefiting from lower COGS and greater operating efficiencies. Netting revenues and expenses, the company achieved $494 million in net income in 2006 from $16.7 million in 1999 (Thompson, et al pp C-102).
Balance sheet
As of July 1, 2006, Coach had a solid balance sheet with low leverage and strong liquidity. Cash and short-term investments were $537 million, bank debt was under $32 million and working capital was $633 million. Beside cash, the bulk of the $1.6 billion of total assets were A/Rs 84 million; inventory $233 million; fixed assets $299 million; and goodwill $228,000. The company had total liabilities of $438 million and shareholder’s equity of 41.19 billion (Thompson, et al pp C-103).

Competitive Strategy
Despite its historical track record of double digit profit, growth is not expected over for now. The company is reducing its prices 10 – 15 % and sales volumes remain under pressure as consumers curb their spending on high-end discretionary goods. This could lower profit margins in the near term as lower sales volumes persist and pricing pressures remain in this economic environment (http://www.morningstar.com/).
In addition to domestic expansion, Coach has great potential in international markets. In Coach’ fiscal 2008, around 20% of its sales were from Japan despite weakness in the Japanese economy in recent months. Even though consumers are pulling back on their purchases of high end goods, it is believed that Coach’s affordable luxury positioning will continue to pay off in the long term. Additionally, it is also believed that expansion into China is key. As Chinese consumers’ disposable income increases and they become aware of the brand, Coach’s sales in the Chinese market are expected to accelerate at a rapid pace (http://www.morningstar.com/).
Strategic Options
In 2007, Lew Frankfort’s (the company’s manager) key growth initiative involved expansion in the United States, Japan, Hong Kong and mainland China, increasing sales to existing customers to drive comparable store growth, and creating alliances to exploit the Coach brand in additional luxury categories. Frankfort believed that opportunity exists to double the number of full-price retail stores in North America and increase the number of North American stores by a third. It was also believed that Japan could support approximately 70 additional Coach stores. Licensed distributors in Hong Kong operated 13 locations there and planned to open at least 10 locations on mainland China by 2007 (Thompson, et al pp C-111).
The second growth initiative was to increase same-store sales through continued development of new styles, the development of new usage collections, and the exploitation of gift-giving opportunities (Thompson, et al pp C-111).
Competitive Landscape
Demand is largely determined by consumer tastes and the comparative costs of manufacture in the US and overseas. The profitability of individual companies depends on operation efficiency and the ability to secure contracts with clothing marketers (http://www.morningstar.com/).
Competitive Advantage
Coach maintains a sizable pricing advantage relative to other luxury brands. Coach handbags are priced from $200 to $500, well below the $700 to $800 prices from other luxury brands Thompson Jr. et al, pp C-100).
Strengths
Coach is positioned as a fashion forward lifestyle brand. Its trendy, high-quality products continue to be popular with consumers seeking affordable luxury. With its operating margins in the high 30% range, Coach ranks as one of the best performing specialty retailers. With little debt on the balance sheet and solid free cash flow, Coach is in excellent financial health and is well positioned to fund growth. Coach continues to expand through new product categories, such as perfume and jewelry, and is evaluating another distribution with its Coach Legacy boutique. In addition, Coach’s growth strategy relies heavily on strong international markets, particularly Japan and China. Coach products are being well received abroad, particularly in Japan. Expansion in the new Japanese markets should fuel growth. The company recorded revenues of $3,180.8 million during the financial year (FY) ended June 2008, an increase of 21.8% over 2007. The operating profit of the company during FY ’08 was$1,147.1 million, an increase of 15.5% from ’07. The net profit was $783.1 million in FY ’08, an increase of 18% over FY ’07 (http://www.companiesandmarkets.com/Summary-Company-Profile/coach,-inc.-swot-analysis-80423.asp).
Weaknesses and Risk
Consumers are cutting back on discretionary goods in light of a challenging economic environment, which is likely to pressure near-term sales and profitability for Coach. Sales are projected in the low single digits in 2009 and 2010 versus historical single digit growth. These modest projections are driven by decreased distribution to stores as a result of a decline in customer demand. After 2010, annual sales growth of around 5% is expected, driven by new store openings, both domestically and abroad. While the company’s strategy to lower prices 10%-15% in its handbag category should help drive sales and contribute to operating and net profits, this may not be sufficient to offset weak sales volumes in this retail environment which is likely to result in both operating margin and profit contraction in the near term. Also if Coach adds higher-priced novelty bags to its handbag collection, as an expansion into the higher priced market, it risks tarnishing its image as an affordable luxury brand (http://www.morningstar.com/).
U.S. retail stores, factory stores, the interned, and the catalog is expected to continue to make up the majority of Coach’s revenue. However, international sales is expected to increase as a percentage of total revenue over the next 10 years as the company ramps up its expansion into China. This projection assumes that Coach will succeed in its expansion efforts both domestically and internationally (http://www.morningstar.com/).

Opportunities & Treats
Coach is riding in style, thanks to the company’s leather items and some savvy licensing deals. The firm designs and manufactures (mostly through third parties) high-end leather goods and accessories, including purses, wallets, outwear, and luggage. Coach, founded in 1941, also licenses its name for watches, eyewear, fragrances, and footwear. The company sells its wares through department and outlet stores (in the US and about 20 other countries), catalogs, and its web site. It also runs about 550 retail and factory outlet stores in North America (with plans to add more by 2009) as well as in Japan. The firm got into selling scents in late 2006 (http://www.hoovers.com/coach,-inc./–ID__101101–/free-co-competitors.xhtml).
Competitors
The three top major competitors of Coach are: Dooney & Burke, kate spade and michael kors. Dooney & Bourke makes high-end handbags and accessories, mostly for women but also for men. They’re sold in department stores (such as Macy’s and Nordstrom), online, and by catalog. The company operates about 10 of its own stores internationally, including seven locations in a handful of US states and a flagship shop in Manhattan. Best-known for its distinctive initial-covered purses, Dooney & Bourke also makes cell phones and iPod cases, as well as jewelry, luggage, apparel, shoes, totes, wallets, and assorted accessories http://www.hoovers.com/coach,-inc./–ID__101101–/free-co-competitors.xhtml).
kate spade’s story is one of simplicity, like the bags it peddles. Begun by designer Kate Spade and her husband, Andy, in 1993, signature kate spade bags were an instant success because of their uncomplicated design. Since then, the company has expanded into stationery, various functional bags, and licensing — with a line of home ware, including sheets, tableware, and wallpaper, as well as beauty products, eyewear, and shoes. kate spade’s products are distributed in Asia and sold in the US through about 25 of its own stores and in upscale department stores, including those of its previous owner, Neiman Marcus. Neiman’s sold the company to Liz Claiborne for about $124 million (http://www.hoovers.com/coach,-inc./–ID__101101–/free-co-competitors.xhtml).
Michael Kors dresses the stars, both real and imagined. The company designs and distributes high-fashion apparel and footwear for men and women. It has expanded its products portfolio through the years by inking several licensing agreements, such as timepieces with Fossil, eyewear with Marchon Eyewear, swimwear with Warnaco Swimwear, and socks with American Essentials. The firm’s collections include such brands as Michael Kors, KORS Michael Kors, and MICHAEL Michael Kors. Michael Kors, himself, owns about 15% of the company, while Sportswear Holdings, the holding company owned by fashion investors Silas Chou and Lawrence Stroll, bought some 85% of the company in 2003 (http://www.hoovers.com/coach,-inc./–ID__101101–/free-co-competitors.xhtml).
Counterfeiting has become so prevalent that the Global Congress on Combating Counterfeiting estimated that 9 percent of all goods sold worldwide were not genuine. The European Union’s trade commission categorized the problem as nothing short of an economic crisis. About two-third of all counterfeit goods were produced by manufacturers in China (Thompson et al, pp C-106).
One of the problem in combating counterfeiting is the demand for knockoffs. In the U.S., China and Europe, vendors and consumers who trade in outdoor street markets knowingly brought and sold fakes and had few reservations about doing so. Even with all the many steps taken to combat counterfeiting, many piracy and counterfeiting experts believe the problem would not subside until the Chinese government adopted a zero tolerance policy against fakes (Thompson et al, pp C-105).

Conclusion
Consumers are cutting back on discretionary goods in light of a challenging economic environment, which is likely to pressure near-term sales and profitability for Coach. The number of millionaires is expected to increase by 23% by 2009, to reach 12 million, with much of the increase in new wealth occurring in Asia and Europe, demand for luxury goods in emerging markets are projected to grow at annual rates approaching 10% (Thompson et al, pp C-105). Luxury goods producers are opening retail stores in India, which is another rapidly growing market for luxury goods. Sales are projected in the low single digits in 2009 and 2010 versus historical single digit growth. These modest projections are driven by decreased distribution to stores as a result of a decline in customer demand. After 210, annual sales growth of around 5% is expected, driven by new store openings, both domestically and abroad. While the company’s strategy to lower prices 10%-15% in its handbag category should help drive sales and contribute to operating and net profits, this may not be sufficient to offset weak sales volumes in this retail environment which is likely to result in both operating margin and profit contraction in the near term. Also if Coach adds higher-priced novelty bags to its handbag collection, as an expansion into the higher priced market, it risks tarnishing its image as an affordable luxury brand (http://www.morningstar.com/).
U.S. retail stores, factory stores, the internet, and the catalog is expected to continue to make up the majority of Coach’s revenue. However, international sales is expected to increase as a percentage of total revenue over the next 10 years as the company ramps up its expansion into China. With the growing demand for luxury goods in emerging markets this projection assumes that Coach will succeed in its expansion efforts both domestically and internationally (.http://www.morningstar.com/).

References

Electronic reference formats recommended by the American Psychological Association.
(2008). Retrieved July 08, 2008 from http://www.hoovers.com/coach,-inc./–ID__101101–/free-co-competitors.xhtml

Electronic reference formats recommended by the American Psychological Association.
(2008). Retrieved July 08, 2008 from http://www.companiesandmarkets.com/Summary-Company-Profile/coach,-inc.-swot-analysis-80423.asp

Electronic reference formats recommended by the American Psychological Association.
(2008). Retrieved July 08, 2008 from http://www.morningstar.com/

Jarrar, Y., & Schiuma, G. (2007), Measuring performance in the public sector:
challenges and trends. Measuring Business Excellence Journal, 11(11), 4-8. Emerald Group Publishing Limited.

Thompson Jr, A.A., Strickland III, A. J. Gamble, J. E., (2008), Crafting & Executing
Strategy: The Quest for Competitive Advantage Concepts and Cases, (16th ed) McGraw-Hill/ Irwin: The McGraw-Hill Companies, Inc.

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Coach Inc: Is Its Advantage in Luxury Handbags Sustainable

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