Coach Inc. on Tuesday reported better-than-expected second-quarter profit, as more people visited Coach stores and more of those visitors snapped up the retailer’s full-priced handbags.
In a telephone interview, Coach Chief Executive Lew Frankfort discusses what happened during the quarter and holiday season, as well as his views on the American consumer. Below is an edited transcript of the interview:
Reuters: Quarterly sales and earnings exceeded your, and Wall Street’s, expectations. How would you describe the quarter and what stood out?
Frankfort: What particularly stands out is the 21-percent same-store-sales growth we achieved in our full-price retail stores. When we break that apart and analyze where that growth came from, we’re particularly pleased because it came from a substantial increase in traffic, conversion and a more modest increase in average ticket. So, (it was) the combination of more people visiting us, buying more frequently, and at a modestly higher ticket.
A second standout was the surge in new customers. When we analyzed where they are coming from what we find is that one-third are coming from other brands that are accessible luxury. A second third are trading up from the more moderate segment, with the remaining third trading down.
Reuters: In the press release you said you are recognizing a larger market opportunity in terms of addressable market size and market share. Can you elaborate?
Frankfort: When we look at new consumers coming into the franchise, one-third of them are trading up from the more moderate segment where historically they have bought bags at lower (price) levels than Coach. When we include this segment, it brings the total addressable market to north of $7 billion. Coach has only about 20 percent of that market. Previously, we had defined our market more narrowly, to only include those consumers who spent historically at our level. That market was about $5 billion to $5.5 billion, so (including the moderate segment) increased the addressable market by 25 to 30 percent … and decreased our market share from 26 percent to under 20 percent.
Reuters: As you expand your range of offerings to include higher-end and more value-priced items, how do you prevent the dilution of your brand’s cachet?
Frankfort: We have always targeted the top 20 percent of U.S. households and we attract an additional 20 percent below the top 20 percent. One of the reasons we introduced Legacy and some of the other higher-end products was so we could do a more effective job in marketing to the top tier of our customers who already shop Coach. Many consumers who are in the top 1 percent to 3 percent in income (already) buy Coach. But they might, for example, buy a Coach accessory, which they might put in their European luxury handbag. These consumers are already customers of Coach and they demonstrated their interest in Coach being a larger share of their accessory wardrobe.
The second thing I might mention is that in America we live in a very egalitarian society where consumers are accustomed to shopping high and low. Consumers are looking for innovation and relevance and perceived value. Americans are not snobbish. We have not felt any snobbery whatsoever from any segment of our target consumer base. Americans don’t have the inherent bias toward luxury that so many people in other cultures have.
Reuters: How did this past holiday season compare to your expectations?
Frankfort: We went into holiday bullish because we had a very strong fall season. What we find is that the best predictor of future behavior is our most recent experience, and we had a very strong fall season with rising traffic and increasing conversion. It bode very well for the holiday season. We built our inventories higher than we otherwise would have, anticipating that the momentum we had experienced in the fall season would continue through holiday, which it has done.
Reuters: What is your outlook for consumer confidence and spending, both with respect to Coach and the economy in general?
Frankfort: At the middle and higher ends, consumers continue to be confident. We believe that spending will be strong. However, consumers are increasingly discerning and judicious. They will pick their shops. They’re looking for products and services that are relevant to their lifestyles.