Coach Inc’s US$2.4 billion acquisition of rival Kate Spade & Co is part of its broader push for fatter profit margins, even if that means settling for lower sales.
As it prepares to take over the handbag maker and revamp its supply chain, Coach indicated that it would pull Kate Spade merchandise from some retailers and so-called flash-sale sites, echoing a strategy it has already adopted for its own brand of luxury goods.
“Near term, it’s definitely going to be painful,” Edward Jones & Co analyst Brian Yarbrough said. “The good thing is, Coach has been through this before and shown they can be successful.”
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Heavy discounting by wholesale customers has hurt the cachet of brands such as Coach and Kate Spade, which sell mostly through their own stores and online.
To fight back, they are trying to move fewer products through discounters such as TJ Maxx and department stores, which have been slashing prices on luxury handbags to cope with slower mall traffic.
Coach on Monday said it would buy Kate Spade as part of its strategy to build a multi-brand lifestyle company from New York, where both companies are based. Known for its whimsical handbag designs, Kate Spade has been successful at luring millennials, who make up 60 percent of its customers.
Kate Spade had become “too dependent on the overly promotional channels of online flash sales and wholesale disposition,” Coach chief executive officer Victor Luis said.
To boost its own margins, Coach has been adding more handbags to its luxury 1941 line and stepping up store services to draw shoppers who are willing to pay top dollar.
Coach’s comparable-store sales in North America rose 3 percent in the first quarter, the fourth consecutive gain and above the 1.4 percent increase predicted by analysts.
Gross margins expanded 1.9 percentage points year-on-year to 70.9 percent.
Coach has also said sales of items priced at more than US$400 now make up 55 percent of handbag sales in North America, an increase from 40 percent posted during the same period last year. The results, delivered last week, sent the stock surging 11 percent, its biggest daily gain in more than six years.
Coach, Kate Spade and their rival Michael Kors Holdings Ltd still have work to do to whittle down the excess inventory at retailers. Among the three, Coach’s products are currently marked down the most — by an average of 42 percent, mostly on shoes.
That compares with 40 percent at Michael Kors and 36 percent at Kate Spade, according to Edited, a data-analytics company for the fashion industry.
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