Macy's and Nordstrom are becoming Coach's worst nightmare

After years of struggling, Coach has executed a turnaround.

For the fourth quarter of fiscal 2016 net sales were up 15%. For the full year, net sales were up 7%.

But one aspect of Coach’s business is seriously slowing down its revival: department stores.

In fact, North American department store net sales dropped 7% to 9%, according to a release.

“This sharp reduction reflects the actions Coach has taken to reduce its exposure to the department store channel, but it also underlines the fact that American department stores are simply not delivering for many medium to high-end brands,” Neil Saunders, CEO of consulting firm Conlumino wrote in a note to clients. “Their store environments, service levels, and discounting policies are increasingly out of kilter with the strategic priorities of Coach, and brands like it. In our view, Coach will wean itself off department stores still further as it enters its new fiscal year.”

This is true — two key parts of its turnaround strategy have been updating its stores and reducing its promotional environment. The company has also been focusing on its marketing strategies and improving its products selection

And, as Gabriella Santaniello, analyst and founder of consulting firm A Line Partners told Business Insider recently, “Coach has done an excellent job of differentiating [between[ wholesale and retail.”

The company admitted in its earnings release that it has been working to “elevate our positioning and streamline our distribution in the department store channel.”

Department stores like Macy’s and Nordstrom typically sell products for more than outlet stores run by Coach, Michael Kors, or Kate Spade. They have resorted to heavy markdowns in an attempt to compete. 

“Ultimately the department store is going to do what they have to do to drive sales — and that includes promotional activity,”  Santaniello said. 

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