A rapid expansion of Coach Factory outlets has overtaken Coach’s more expensive goods, as well as its image as a luxury brand.
Navigating the balance between luxury and affordable is a rare feat in retail, as Coach is finding out. The brand's aggressive expansion into outlets in the past decade has not only hit its higher-end luxury products, but it's making it harder for Coach to transform into a cool, aspirational lifestyle brand in the U.S. The retailer reported Tuesday an 18% plunge in North American sales for the year's first three months, continuing a dismal trend it expects to persist, and sending shares to the biggest loss in the S&P 500.
Victor Luis, who became Coach's new chief executive officer in January, has a lot on his plate: Coach is now selling a much broader array of merchandise than it has in the past, including coats, sandals, and even $400 leather baseball gloves. Newer rivals like Michael Kors, Tory Burch, and Kate Spade are on fire, especially with young women, eating into Coach's high-margin U.S. handbag business, which still dominates sales. And while Coach is putting a lot of faith in new executive creative director Stuart Vevers to infuse freshness into the brand, his designs won't hit full-line stores until Sept. 15.
But a large part of Coach's woes are self-inflicted — the company has aggressively expanded its outlet business, cannibalizing sales of its upscale and fashionable full-price brand. It's even pushed outlet goods online in the past few years, where the distinction between full price and factory is especially blurry, particularly for a luxury brand.
There are now 205 Coach outlet stores in North America versus 338 full-price locations, a gap that's poised to shrink even further this year, following the trend of other retailers whose sales at off-price locations have been booming. (The pricier brand is also sold at department stores.) Geographically, the two have been placed closer and closer to each other over the past decade. In 2005, Coach said in its annual report that most of its factory stores were located 50 to 100 miles from major markets. By 2008, that language had been tightened to "generally more than 50 miles" away. Now factory stores tend to be more than 30 miles from major markets, as per its latest report.
"Continued planned North America outlet expansion makes no sense to us in terms of restoring the luster of a luxury brand or creating a lifestyle in which the company's core full-price customer will want to partake," Eric Beder, an analyst at Brean Capital, wrote in a note yesterday.
What's key is that the vast majority of Coach's outlet goods are made for outlets — a practice that most retailers engage in now — resulting in a proliferation of branded items you'd never find a full-line store. Back when outlet stores first started, they were a place for excess or slightly damaged inventory, but that's no longer the case.
Coach doesn't hide that. The company says in its annual report that factory stores, which are highly profitable, are "an efficient means to sell manufactured-for-factory-store product, including factory exclusives, as well as discontinued and irregular inventory outside the retail channel." Coach's head of investor relations, Andrea Shaw Resnick, told BuzzFeed that around 85% of outlet merchandise is made-for-factory. Much of it is unique to the stores, though Resnick noted it also includes "archived designs and customer favorites from our full-priced assortment from previous seasons and years."
The reason it works is that Coach believes its average outlet customer is totally different from its average full-price shopper. In the 2008 report, Coach said factory stores were meant to target "value-oriented customers who would not otherwise buy the Coach brand," at prices knocked down 10% to 50% from regular stores. Resnick said in May 2011 that there's only a 20% overlap between the two groups: The outlet buyer tends to want the brand for the sake of the name at a discount, while the full-line retail customer cares more about what's in fashion, she said.
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