Coach suffers from discount withdrawal

October 28, 2014, 5:25 PM UTC
Coach shopping bag

Coach (COH) is having a hell of a time weaning shoppers off the deals they’ve come to expect.

The leather-goods maker is trying to “elevate” its brand after years of aggressive promotions, particularly at its outlet stores, that damaged its luxury aura and brand, and sent shoppers looking for handbags at competitors Michael Kors (KORS) and Kate Spade (KATE) in recent years.

But for a company which by some estimates gets at least half of its sales from its North American factory outlets businesses, pulling back on the number of sales events, particularly online, is hurting.

Comparable sales in North America fell 24% in the quarter ended Sept. 27. That was a little better than expected, but shoppers still want deals, and Coach’s competition was happy to indulge.

“In outlet stores, the overall environment was definitely more promotional,” said Fran Della Badia, president of North America Retail at Coach. “Competition was even more aggressive.” (It’s very reminiscent of J.C. Penney’s (JCP) attempt to cut back on discounting in 2012 even as rivals ramped up theirs- it didn’t work out.)

Coach is in the process of closing 20% of its North American stores to focus on more important flagships in hub cities, and is betting that the first collection by star designer Stuart Ververs, which hit stores last month, will help restore its upscale aura. Indeed, Della Badia found a glimmer of hope in part of Coach’s results—sales of its pricier handbags, which Coach defines as $400 or more, grew. And Colette, a new higher end brand did well, she added.

Coach CEO Victor Luis talked to Fortune about the time it was taking for improvement to kick in.

“Green shoots don’t happen overnight. It’s a multi season process. One of our goals is restoring our fashion credibility,” Luis said, adding Coach has made progress on that front.

Those signs of progress initially buoyed Coach shares on Tuesday. But the stock did a 180-degree when Luis gave investors a new reason to worry: what he called “tremendous variability” in its sales in China, a market that has given Coach a much needed source of growth.

The student demonstrations in Hong Kong forced Coach to close some stores in China, but Luis, CEO since the start of 2014, said the “biggest impact” came from a drop in the number of Chinese tourists going to Hong Kong. Tourism by Chinese travelers to Malaysia was hurt by the two incidents involving Malaysia Airlines flights. The company nonetheless also kept its target of China sales rising to $600 million this year, or about 14% of sales expected by Wall Street analysts. Luis expressed confidence that government efforts to drive consumption there, urbanization and the growing middle class mean it remains full of promise long term.


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