Best in Class: Coach's Price is Right - TheStreet

NEW YORK (TheStreet) -- Lowering prices is a risky feat for any luxury retailer. Shoppers love discounts, especially in lean times; the market, though, fears the dilution of the brand. But recently Coach (COH) is seemingly proving that a shrewdly managed company can successfully appease both sides.

For Coach, the critical step in that turn was made a year ago by CEO Lew Frankfort, who chose to lower entry-level price points by 15%, a move that helped the company effectively manage the economic downturn.

Coach's newer Poppy line is targeting frugal consumers.

But let's be clear about one thing: Coach isn't calling this a sale. Frankfort -- in an exclusive interview with

TheStreet

this past week, was adamant about this; Coach never has sales. There are no blaring signs in store windows drawing attention to these lower prices, no advertisements highlighting value merchandise. Instead, Coach's plan has been for consumers to get a pleasant surprise when they pick up a bag they expect to be $500 and it is only $200.

This Poppy line, which features handbags ranging from about $200 to $300, received an overwhelming reception and provided a much needed boost during the holiday season. In fact, Coach's second-quarter 3.2% gain in North America same-store sales (its first positive comparable sales number in over a year) is attributable, in large part, to the Poppy line.

"Coach has one of the best management teams out there," Needham analyst Christine Chen says. "They reacted appropriately to the environment without tarnishing the brand."

The net result: currently, 50% of Coach's assortment is $300 or less -- which compares to only 30% of merchandise in this price range last year. "We are seeing a new normal evolving," Frankfort says. "For the foreseeable future consumers will be price conscious in discretionary spending and we need to keep that in the forefront of our minds."

Translation: Coach doesn't plan on doing away with these new entry-level price points any time soon.

This, however, doesn't mean Coach is ignoring the higher end. In fact, as Coach adds lower priced items, it's also expanding its exclusive merchandise and bag offerings over $800, Wall Street Strategies analyst Brian Sozzi says.

And today, the most successful luxury retailers like

Tiffany

(TIF) - Get Report

and

Nordstrom

(JWN) - Get Report

are adopting similar pricing strategies.

Tiffany, for one, expanded its silver selection and introduced a more wallet-friendly Keys collection for the holidays. As a result, Tiffany sales over the November-December period shot up 17% to $799.1 million, which prompted the jeweler to boost its full-year outlook.

Nordstrom is also going after a "good, better, best" tiered-pricing strategy, and is currently building out its Rack outlet stores. The luxury department store reported a 14% surge in January same-store sales.

Still, although business may be picking up in the United States, Coach's biggest growth opportunity is actually in China. Currently Coach only has 32 stores in the country, with plans to have 43 by June, but Frankfort says that based on where China's economy is today, the nation could support at least 150 locations.

Indeed, Frankfort compares Coach's development in China to its growth in the United States in the 1980s. "In the early 80s Coach had a small cult following," he says. "We were in Chicago down to Washington; not yet a national brand."

Then between 1985 and 1995 the business exploded $20 million in revenue to $500 million.

Frankfort draws parallels to China, which also has a very loyal following, and has recently seen same-store sales growing by double-digit percentages. But he also notes that China is even more exciting than the U.S. was in the 80s, because it is a rapidly developing country, whereas the U.S. was already economically developed by that time.

Sozzi predicts China will add 20 cents to 25 cents to annual earnings in the next five years and 3 cents to 4 cents in the next 12 months.

Even with China announcing the tightening of bank lending on Friday, Frankfort says he isn't worried. "China's decision to tighten lending does not affect our expansion plans in the country," he says. "The emerging middle class is taking hold and growing rapidly."

Best of all for Coach, Chen says, is that China's growing middle class generally cannot afford European luxury brands, making Coach an attractive alternative.

While Coach is present in 25 international markets, Frankfort wouldn't call the company a global brand -- although that could change soon, as the retailer prepares to enter Western Europe. Indeed, during his recent interview with

TheStreet,

Frankfort revealed that he plans to soon announce an entrance strategy for an unnamed Western European country.

Looking closer to home, Frankfort also said Coach holds several square-footage expansion opportunities, even while other retailers are shuttering stores. Although Coach currently has just 350 locations in North America, Frankfort predicts the company could have a portfolio of 500 stores in the not-too-distant future, and is targeting secondary cities like Anchorage, Alaska; Madison, Wisconsin; and Baton Rouge, Louisiana, with plans to roll out 20 new stores this year.

The company will also launch its first men's-only store in New York City in May.

Frankfort noted that a men's-focused store will give it a "laboratory to work on emerging collections and merchandizing techniques." Management believes the new concept will have the most success in Asia, where men are more involved and interested in accessories like tote and travel bags. Sozzi, for his part, says the men's store presents an interesting opportunity, as there are not many accessories stores catering solely to the male demographic.

Coach is no doubt a standout in the sector; still some analysts are wary of buying into the stock, which is trading at a premium. Shares of Coach closed on Friday at $35.47, near the high-end of its 52-week range between $11.41 and $38.65.

As a result, Goldman Sachs analyst Adrianne Shapira downgraded Coach last week to neutral from buy and cut her price target in the company's shares to $37 from $42.

Shares in Coach, in other words, are hardly trading hands at sale prices. But that is, after all, appropriate. If we've learned anything about Coach, it's that Coach simply does not do sales.

-- Reported by Jeanine Poggi in New York.

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