Coach Thinks Outside the Bag

Three years ago, Coach watched its sales plummet as Americans lost interest in its iconic handbags. Today, under CEO Victor Luis, it’s in the midst of a remarkable recovery. Here’s how Coach is climbing out of purse purgatory.

It’s not every day that you hear a $3,500 leather jacket described as a bargain.

But that’s the argument Coach CEO Victor Luis is making as he shows off a piece from Coach’s new collaboration with hip luxury brand Rodarte. He runs his fingers over the hundreds of small brass rivets fashioned into a floral pattern, marveling at the craftsmanship. “These are hand-painted, cut out by hand, and stitched in one at a time,” Luis says. “In Europe they’d call this haute couture. The reality is that at $3,500, it’s a steal.”

It still sounds steep, even for a high-end retailer like Coach (COH); after all, the average domestic sales price for one of the company’s famous handbags is only about $325. Then again, this jacket is a statement—a symbol of the strides Coach is making in reestablishing the brand’s upscale aura.

Coach Link Strap Saddle Bag 23, Fall 2017.Photograph by Alex Fradkin for Fortune
Photograph by Alex Fradkin for Fortune

The same goes for Luis’s surroundings: the company’s spanking-new three-story, 20,000-square-foot flagship on New York’s Fifth Avenue, dubbed “Coach House.” It’s a stone’s throw from Valentino, Gucci, and Harry Winston on the world’s most expensive shopping strip. The store is guarded by a playful mascot, a 13-foot dinosaur called Rexy constructed out of 400 Coach bags.

Luis greets store staff by name and happily shows off the shop’s monogramming counter and the wall display showcasing classic Coach bags going back to the 1940s. The CEO’s favorite design touch: the mosaic floor in the store’s elevator, depicting Coach’s horse-and-carriage logo. “I’ve always wanted the store to feel like it harkens back … to our founding and to the romantic days,” he says.

Rexy, a dinosaur constructed out of 400 Coach bags, presides over the Coach flagship store in NYC.Courtesy of Coach
Courtesy of Coach

Coming from Luis, that sentiment carries extra meaning. Since taking Coach’s reins in 2014, the 50-year-old executive has done what few retail CEOs have been able to do: tapped into his company’s successful past to help it compete in a difficult present. Three years ago, Coach was hemorrhaging market share, suffering the effects of a discount-fueled expansion that tarnished its brand and drove customers away. To revive the company, Luis essentially launched a campaign to recover its 20th-century mystique. He shrank the business—on purpose—and repositioned Coach as a smaller, healthier retailer, prioritizing quality over mass-market quantity.

The flagship store and the $3,500 jacket represent the quality side of the formula. Executive creative director Stuart Vevers has reinvented Coach as a player in high-end apparel—which in turn makes it easier for Coach to sell other products at a premium. But it’s the quantity part of the equation that represents the bolder move. Since 2014, Coach has closed dozens of stores, ended most online flash sales, and begun exiting hundreds of department stores, top line be damned.

Creative director Stuart Vevers.Photograph by Alex Fradkin for Fortune
Photograph by Alex Fradkin for Fortune

The strategy caused heart-stopping sales declines; Coach’s North American revenue fell by double-digit percentages in its fiscal 2014 and 2015, and shares still trade at barely half what they did in 2012. But the tough medicine is now paying off. Coach recently reported its fourth straight quarter of North American comparable sales growth; and total sales are on track to tick up for the second year in a row in fiscal 2017, to $4.5 billion. “This company is materially healthier than it was two, three years ago,” says Craig Johnson of Customer Growth Partners, a retail consultancy. Coach is weaning customers away from deep discounts, an achievement most retailers can only fantasize about. And a few weeks ago, it announced a $2.4 billion acquisition of erstwhile rival Kate Spade, a deal that added an exclamation point to Coach’s comeback story.

Charts show Coach's store count, sales and North America handbag market share
Nicolas Rapp
Nicolas Rapp

To be sure, it’s far too early for Luis to claim victory. One Citi analyst recently mocked references to Coach’s “turnaround,” noting that North American sales remain 30% below their peak. The company still gets the majority of its revenue from outlet stores, where cachet takes a back seat to price cuts. And it’s still heavily reliant on handbags—a category whose sales growth has slowed to a crawl.

That’s why the Kate Spade acquisition is so significant. It’s both an assertion of strength by the company and the biggest move to date in a radical strategic pivot. Luis wants Coach to become the first U.S. luxury accessories conglomerate, a smaller, stateside version of an LVMH or Kering or Richemont, whose portfolio will include shoes and high-end apparel as well as leather goods. Evolving into a “house of brands” could protect Coach from the ups and downs of depending on one product and one brand—and secure its future.

Founded in 1941 as a modest, family-run New York workshop, Coach owes its emergence as a luxury brand to an anything-but-luxurious American pastime. In the early 1960s, it began making wallets out of the hard, durable leather used in baseball mitts. (Industry lore holds that Coach got the leather cheap from a supplier with excess stock to get rid of.) The resulting products became softer and malleable over time, like an outfielder’s glove, earning Coach a reputation for quality and a loyal clientele. And Coach’s cachet grew immeasurably after the company hired Bonnie Cashin in 1961 to launch its women’s line. Cashin created what are now iconic features of Coach bags, like the small hangtag that bears the brand’s name, and the signature turn-lock.

Leather swatches used to provide materials and textures for Coach prototypes and samples.Photograph by Alex Fradkin for Fortune
Photograph by Alex Fradkin for Fortune

Coach wallets, money clips, and bags became standard gifts for someone finishing college or getting a first job. And the company’s growth went into hyperdrive under Lew Frankfort, its CEO for more than three decades. Frankfort saw an opening in the market for affordable luxury. “Where they would be pricey, we would be affordable,” Frankfort tells Fortune, describing European luxury brands. “Where they would be snooty, we would be friendly.” That orientation led rivals to dismiss Coach as “McDonald’s luxury,” but it also elevated Coach from niche to powerhouse. On Frankfort’s watch, Coach’s total revenues rose from $6 million in 1979 to $5 billion in 2013, a more than 800-fold increase.

Still, that aggressive expansion came at a cost. As Coach grew, it lost focus and prestige. In 2008, as the Great Recession loomed, Frankfort doubled down on store expansion, broadened its lower-end collections with bags made of cheaper fabric, and added far more products carrying Coach’s “C” logo. The company also went all in on factory outlets. Coach has never broken out how much those stores generate, but by 2013, Wall Street firms had it pegged at 60% of sales. “That’s how industries commoditize themselves,” says UBS analyst Michael Binetti. Soon after the recession, more than half of Coach’s sales came from handbags costing a relatively cheap $200 to $300.

Bags stored in the archives at Coach’s headquarters.Photograph by Alex Fradkin for Fortune
Photograph by Alex Fradkin for Fortune

None of that mattered as long as Coach was growing. The company reached a high-water mark in 2011, leading the U.S. handbag market with a 29.2% share, according to Euromonitor International. But upstart brands like Michael Kors (KORS), Tory Burch, and Kate Spade soon began outmaneuvering Coach. Kors was a particularly aggressive foe—opening stores right next to Coach at dozens of malls, to siphon off traffic, and undercutting Coach on price.

Worse yet, Coach’s brand was losing its distinctiveness. At one point in 2014, Coach execs showed employees slides of Michael Kors, Kate Spade, and Coach stores with their logos blocked out and quizzed them on which was which. To the dismay of the brass, many of the staff couldn’t tell them apart. By that year, customers had gradually turned their backs on a brand many now saw as schlocky; Coach’s share of the handbag business had fallen 12 percentage points, and Kors was No. 1. “You literally saw market share just walk across the mall,” says Binetti. This was the exodus that Victor Luis would be asked to stop.

Upscale retail was pretty much unknown on São Miguel, the impoverished island in Portugal’s Azores archipelago where Luis was born. Relatives in the U.S. would send young Victor care packages of clothing and Wrigley’s gum. Today, in his office overlooking New York’s Hudson Yards development, he keeps a glass bowl filled with Wrigley’s as a reminder of those days.

Victor’s family immigrated to the U.S. in 1973, when Victor was 7, eventually settling in East Providence, R.I., where his parents made ends meet with manufacturing jobs. Victor earned a scholarship to College of the Holy Cross in Worcester, Mass., then studied international economics on a Rotary fellowship at Durham University, in Britain. He seemed destined for academia. “Because of our blue-collar background, luxury was the furthest thing from my mind,” he says.

The atrium at 10 Hudson Yards, home of Coach’s headquarters.Photograph by Alex Fradkin for Fortune
Photograph by Alex Fradkin for Fortune

But luxury found Luis. In Britain, he met a fellow expat who had started an import company bringing Portuguese cork, wines, and crystal into Japan. Luis joined the venture in 1991, and it led to a marketing job in Japan with Moët Hennessy, a boozemaker owned by French conglomerate LVMH. Later came gigs as CEO of the Japan unit of LVMH’s Givenchy—Luis’s first exposure to fashion retail—and as North American chief for French crystal maker Baccarat.

That circuitous journey helped Luis develop what colleagues say is a rare combination of conceptual creativity and skill at execution. As Frankfort puts it, “He can go high and low at the same time.” It also taught Luis that he’d have a greater chance of reaching the top at an American luxury company, since family ownership at European conglomerates limited upward mobility. In 2006 he joined Coach as head of its Japan business; he rose to head its international division, and by 2013 he’d been named second-in-command and was being groomed for the top job. Early the following year, he took the reins as CEO from Frankfort.

By then, the board and C-suite were deep into a debate about Coach’s direction. The company had made incremental changes, unveiling a new look for stores and moving deeper into clothing and footwear. But Luis decided Coach had to take much more drastic steps. In June 2014 he announced that Coach would close about 70 North American stores, or 20% of its fleet, to concentrate its store budget on its best locations and spruce up their look. Luis ratcheted back online sales events for outlets (they now do two or three a month, rather than 13), even as he improved the product selection in those factory stores. And he later began pulling Coach out of many department stores, theorizing that those venues’ dwindling shopper traffic and deep discounts on other products were cheapening Coach’s reputation.

The CEO of Coach, Victor Luis.Photograph by Alex Fradkin for Fortune
Photograph by Alex Fradkin for Fortune

Coach now has 222 North American stores, excluding outlets, compared with 354 five years ago. You don’t need an MBA to know that fewer stores mean lower sales. But even at remaining stores, sales plunged. On the day Luis announced the first closures, Coach’s stock dropped 9%. He and his team warned Wall Street to expect about eight quarters, an eternity in retail, before North American revenue would turn around. To analysts’ amazement, the forecasts were spot on, earning Luis and Coach a ton of credibility in the investment community.

The forecasts came true largely because Luis’s bet paid off: Becoming less ubiquitous restored Coach’s aura. In UBS’s recent annual survey of handbag shoppers, 72% of customers had a favorable view of Coach, and respondents gave Coach higher marks for quality than Kate Spade or Kors. Just as important, in Coach’s most recent quarter, 55% of the handbags it sold in North America cost $400 or more, up from just 30% two years earlier.

Those are heartening numbers in a value-conscious era. During the Great Bag Boom earlier this decade, women would buy several handbags a year to build a wardrobe. “Now it’s about collecting one signature item, that one great bag,” says Marshal Cohen, chief industry analyst at market research firm NPD Group. And Coach is often that bag. “They’ve begun to create buzz around the brand again,” says Ron Frasch, a former chief merchant at Saks Fifth Avenue, and now a private equity executive.

But that buzz wasn’t built on austerity.

When Stuart Vevers wants to reconnect with the DNA of the Coach brand as he sets about designing a collection, he hangs out in the climate-controlled archives on the ninth floor of company headquarters, where it houses 28,000 Coach items going back decades. Among the gems are a 1981 “Stewardess Bag” for United Air Lines’ flight attendants, with the airline’s logo embossed in the leather, and a 1968 Bonnie Cashin–designed handbag called “Holster,” a simple classic that wouldn’t look out of place in a Mad Men episode. “It’s got a history, and that’s why there’s trust,” he says of Coach’s collection.

The production area at Coach headquarters where prototypes are made.Photograph by Alex Fradkin for Fortune
Photograph by Alex Fradkin for Fortune

Though Vevers is British, he’s enamored of America’s take on luxury, which emphasizes youthfulness and quirkiness over European-style formality. In the five years before he joined the company, Vevers (who doesn’t have a driver’s license) took frequent Amtrak trips to deepest America, hitting vintage shops at stops along the way. “I was inadvertently researching my first collection at Coach,” says the designer. The research paid off: Luis and Frankfort recruited Vevers in 2013, poaching him from Loewe, the LVMH-owned European fashion house. Vevers won the job with sketches of a collection of baseball jackets, and the deal was sealed during a weekend visit to Frankfort’s home in the Hamptons.

Coach had made a brief foray into haute couture in the late 2000s, with an eponymous line by former design director Reed Krakoff, an architect of the company’s mass-market rise. That effort fizzled; Vevers’s has soared. He began with small showings at New York Fashion Week. By 2015 he’d assembled a full ready-to-wear collection, for spring 2016, that anchored Coach’s first-ever runway show. The collection drew raves in the fashion press: Vevers recalls how coworkers wept with relief when the reviews came in. And this year, at the Metropolitan Museum’s Costume Institute gala, actress Selena Gomez, Coach’s new celebrity spokeswoman, generated buzz on the red carpet in a Vevers-designed dress, a rare Coach foray into evening wear.
Drawings and appliques produced for Coach’s prototypes and samples.Photograph by Alex Fradkin for Fortune
Photograph by Alex Fradkin for Fortune

Coach is also wooing fashionistas with more casual clothing, like floral dresses and shearling jackets. At Coach’s fall 2017 New York Fashion Week show in February, Vevers showed off irreverent fare such as leather doctor bags covered in prints of vintage cars or cherries. “The idea of luxury has shifted so much,” he tells Fortune.

Apparel remains only a small component of Coach’s revenue; couture, even smaller. But their impact on the brand stretches beyond dollar terms: They help fix what UBS’s Binetti calls “the brand’s halo,” reestablishing an aura that burnishes the entire product line. Vevers says he wants to make people feel “cool” when they put on a Coach leather jacket; that, in turn, is one key to commanding higher prices.

In 2015, on his first anniversary as CEO, Luis landed a $574 million cash deal to acquire luxury footwear brand Stuart Weitzman. The deal immediately made Coach a more serious player in shoes. But it also was a down payment on a strategy that Luis hopes will eventually leave Coach far less vulnerable to trouble in the handbag market.

In Europe, most luxury brands are part of a conglomerate. LVMH owns Christian Dior and Louis Vuitton. Kering has Saint Laurent and Gucci. Richemont has Montblanc and Cartier. Stateside, in contrast, many high-end names are stand-alone public companies: Tiffany & Co. (TIF), Ralph Lauren (RL), Michael Kors, and of course, Coach. U.S. investors don’t generally love conglomerates. They often trade at lower multiples because Wall Street sees diversification as destroying value, notes Aaron Cheris, head of Bain & Co.’s retail practice in the Americas. What’s more, conglomerates often subsidize struggling brands rather than act decisively to fix them. “You really want people in a brand to have their hair on fire if they need a turnaround,” says Cheris.

But having worked under both, Luis leans toward the European model. “Operating multiple brands allows you to make better long-term decisions for each brand,” he says, without the pressure to take shortcuts to resolve short-term crises.

A “drawing wall” decorated by employees at Coach headquarters.Photograph by Alex Fradkin for Fortune
Photograph by Alex Fradkin for Fortune

Coach has a lot to offer the companies it buys. In an industry known for indiscipline—“Our industry historically shoots from the hip,” says longtime Coach executive Todd Kahn—it’s widely regarded as a superbly run company, with a strong supply chain and a knack for eliminating inefficiencies. And its clout with landlords could make it an ideal partner for fashion brands with rising reputations but fewer resources, helping them secure better real estate. Those brands, of course, would be just as valuable to Coach: They could help the company capitalize on trends in fashion and luxury wherever they appear.

Coach itself has been the subject of takeover rumors, but in the past year executives have sent clear signals that they’d rather eat than be eaten. In April the company hired Joshua Schulman, ex-president of Bergdorf Goodman, to become CEO of the Coach brand starting in June—a clear signal that Coach Inc. is restructuring itself as more of a holding company. At different points, rumors flew that Coach was pursuing Burberry, Kate Spade, and shoemaker Jimmy Choo.

Ultimately, it was Kate Spade that looked most attractive. On the surface, the deal doesn’t diversify Coach’s product portfolio as much as, say, Burberry might have, since Kate Spade, too, is best known for handbags. But the smaller firm has well-developed product lines in shoes and apparel. As Luis points out, its buyers skew younger: 60% of Kate Spade customers are millennials, compared with less than 50% for Coach’s brand. And the acquisition will put Coach in better shape to compete with Kors, which is now having struggles of its own with the effects of overexpansion.

The purchase will deplete much of Coach’s $1.9 billion cash hoard, making it likely that its next acquisitions will be small. Still, speaking with Fortune on the day the deal was announced, Luis depicted the acquisition as a step toward making a luxury conglomerate in the American mold, rather than the European.

Updating Frankfort’s “accessible luxury” ideal, Louis describes Coach as “modern luxury.” Unlike an LVMH or a Kering, Coach Inc. will not focus on the very loftiest tiers. “ ‘Modern’ means brands that are inclusive, brands that are more approachable, that are not just based on exterior symbols of status,” says Luis. “We’re not based on exclusivity at high prices that only a few can afford.”

For now, Coach’s vision is boosting spirits inside the company, and inspiring renewed faith from outside investors—Goldman Sachs, long a Coach skeptic, recently upgraded the stock. Since September 2015, its stock is up more than 50%, roughly double the S&P 500; it rose another 5% the day after the Kate Spade announcement. Even without another big buy, the handbag brand has room to grow in Europe and in China (already a $600 million market).

But Luis knows full well there are few industries as fickle as fashion and luxury. That’s why he repeatedly invokes a “multibrand” future where other components of the Coach portfolio drive more growth, in case handbags keep losing steam. “Anytime a brand tries to be the brand for every consumer, invariably it loses its uniqueness,” says Luis. That’s not a road Coach plans to go down again.

A version of this article appears in the June 1, 2017 issue of Fortune.

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