Things were awful for Coach (COH) in its second fiscal quarter. But less awful than expected, giving Wall Street some solace that the leather-goods maker’s efforts to fix its brand are starting to work.
Coach, known for its Poppy handbags, reported on Tuesday that comparable sales in North America fell 22%, a disaster by most standards. But it was a slightly smaller drop than the 24% decline analysts surveyed by Consensus Matrix were expecting.
After years of heavily discounting its wares by holding countless sales and over expanding its store fleet, Coach’s brand lost a lot of its luster and has seen much of its North American market share gobbled up by the likes of Michael Kors (KORS) and Kate Spade (KATE). Last year, it announced an aggressive store closing campaign (20% of its North American stores), a reduction in the number of promotions with a view to giving Coach its accessible luxury aura back and focusing more on fashion. CEO Victor Luis recognized it was painful to take away most deals while the competition ramped them up, but told Fortune it had to be done.
“It’s very much part of our plan—we know a pullback was a necessary step to re-platform the brand,” CEO Victor Luis told Fortune. “We are fully aware that this is a multi-year journey.”
The company’s quarterly report showed that Coach is making progress. Here are some takeaways from the report.
1. Positive comparable sales at its new concept stores
In June, Coach announced it would close 70 of its 350 North American stores to focus on fancier locations with better selection and presentation in fewer but more important markets, 12 metro areas in particular. While those new souped up locations only number 20 globally, including four in the United States, they saw increases in comparable sales, supporting Luis’ claim that better store presentation will re-elevate Coach’s brand.
2. Signs Coach’s brand reputation is healing
The second quarter was the first to include sales of clothing by Coach’s star designer Stuart Vevers since he joined in 2013. His collection, which includes fashion, footwear and handbags, represented 90% of Coach’s women’s offerings during the holiday season and seems to have helped Coach begin to reclaim its upscale aura. Luis told Wall Street on a conference call that brand tracking showed improved perception of quality and of the extent of aura-draining discounting.
3. Soaring sales in Europe and China
Europe is a tiny market for Coach for now but one full of potential because of all the tourists, Chinese in particular, who go there to snap up Western brands. Comparable sales in Europe rose by a double-digit percentage last quarter. Meanwhile in China, Coach is still on pace to hit $600 million in sales for the fiscal year (which ends in July), after sales rose 13% despite concerns of an overall slowdown in luxury spending there. Growth in these two markets will help dull some of the pain Coach is going through in North America on the way to recovery.
4. Coach’s pricier handbags are catching on
Coach’s sweet spot and cash cow was long its assortment of $200-$300 handbag that were well made and had a hint of luxury to them. But those ended up mired in Coach’s cycle of discounting. The company has been trying to ween customers off of discounts and get them more interested in pricier bags. And there were signs that worked: $400+ bags had positive sales gains and generated 30% of sales compared to 20% a year earlier.
5. Inventory levels lower risk of discounting
Overall sales declined 14%, but merchandise inventory was down 20%, which greatly reduces the odds Coach would have to discount leftover merchandise and harm its profit margin. Coach said its gross profit margin should be steady in the 69-70% range.