Coach shares dropped more than 6% Tuesday after the company reported a disappointing decline in first quarter sales.
North American sales plunged 19% and international sales rose just 4%. The company also reported a 9.6% decline in third quarter revenue to $US1 billion.
Here’s why the company is in trouble:
1. Coach’s core business in North America — the sale of women’s handbags and accessories — is failing.
“For both the quarter and the year, our women’s handbag and accessory business was challenged, facing both increased competition and intensified promotional activity,” Coach CEO Victor Luis said on a call with analysts in August.
2. The company just posted its slowest quarterly sales growth in China in two years.
China sales grew 10% in the first quarter, down from 20% in the previous quarter. The company has been counting on China to offset its losses in North America.
Meanwhile, sales in Japan dropped 12% over last year, marking the eighth straight quarter of declines.
“There’s some concern about the slowdown in China, as well as the Japan business, which continues to get weaker,” Brian Yarbrough, an analyst with Edward Jones & Co., told Bloomberg.
3. The company cannibalised its more upscale, full-price products by aggressively expanding its discount outlets.
Industry expert Robin Lewis estimates that Coach gets about 70% of its revenues from discount stores.
“Once a brand is declared as too accessible and overexposed by its loyal customers, no amount of fashion trickery will bring it back,” Lewis writes on his blog.
Coach has reduced its frequency of discounts at full-price stores in an effort to restore the brand’s value.
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