It’s Raining Promotions This Holiday Season In The Handbag Industry

Coach (NYSE:COH) in recent quarters has undertaken a number of steps to move away from the discounting, which has hurt its brand. During its fourth quarter and financial year 2016 (ended June), Coach announced its decision to pull the company’s handbags and leather goods out of 25% of department stores, or by over 250 locations; a move which is specifically designed to protect its luxury brand image. Furthermore, the company intends to reduce the markdown allowances to the channel, citing a highly promotional environment embraced by such stores. The heavy discounts offered in this channel makes it harder for consumers to spend more on a similar bag at the company’s own stores or its e-commerce websites. While the company didn’t specify the names of the wholesale stores, according to the company’s regulatory filings, Macy’s, Nordstrom, and Lord & Taylor are its most significant customers. However, in the current holiday season, it seems to have reverted to its old ways. According to Wells Fargo estimates, although the company looks to be more promotional this year, as against last year, it was only modestly incremental. Furthermore, the company has excluded its Coach 1941 collection from the discounting, which make up approximately 25% to 30% of its company value.

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Coach isn’t alone in following the discounting trend. Other companies in the handbag space, such as Michael Kors and Kate Spade, have also been carrying on with their promotional activities in the holiday season. The former company ran its “buy more, save more” campaign, while the latter was seen to be offering up to 70% discounts at its stores.  As per Instinet analysts, promotions at brands such as Kate Spade, Tory Burch, and Ralph Lauren (NYSE:RL) were similar to last year. However, companies like Coach, Michael Kors, and Fossil Group offered deeper discounts. This does not bode well for these affordable luxury companies fighting a battle against discounting.

Department Store Pull Back Seen In The Industry

The root of the discounting problem lies with the availability of these brands at the wholesale or outlet stores, which have been offering huge discounts to attract customers. Coach was among a number of brands trying to cut back its presence in this channel. Michael Kors, which generates about 40% of its sales from its wholesale locations, is also reducing the amount of merchandise it sells through the channel. Kate Spade, which is still building out its wholesale network as it is a much smaller brand, is also taking a careful and cautious approach. Since outlet stores are usually located in tourist locations, they’ve been hit particularly hard, as a strong dollar has hurt the tourist inflow into the US.

Coach Concentrates On Its Retail Stores And Website

Coach has its roots in the wholesale business, as it began as a wholesaler to department stores in the 1940s. However, the company no longer receives a bulk of its sales from this channel. According to Bloomberg, the company currently gets less than 5% of its total business from North American department stores, despite having a presence in a thousand locations in the country. In as early as 2004, the company attained over 45% of its sales from wholesale channels. In recent years, the company has concentrated on building out its own retail locations or selling the merchandise through its e-commerce websites. While this move is aimed at increasing the AUR (Average Unit Retail) and improving its margins, its current excessive promotions stance will not help matters.

Have more questions on Coach? See the links below:

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• Coach’s Strong Presence In China To Help The Company In The Future
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• Coach Q3 2016 Earnings And Revenue Beats Expectations
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