Bloomberg

(Bloomberg) -- Luxury handbag maker Coach Inc. has spent the past few years working to revive sales, refresh designs and shake off heavy discounting. Now it has its next strategy firmly in sight: building a multibrand company through acquisitions.

With a war chest of more than $1.8 billion in cash, Chief Executive Officer Victor Luis has let it be known that he’s interested in purchasing handbag, accessories, footwear and outerwear brands. There’s no lack of speculation about targets. In recent months, New York-based Coach was said to be interested in Burberry Group Plc and Kate Spade & Co., and there’s been buzz about Jimmy Choo Plc.

Two newly created management roles -- to oversee the Coach brand and to develop global strategic partnerships -- attest to Coach’s ambition. Luis described both jobs as an important step in the company’s multibrand evolution. Earlier this year, Coach also hired a new chief financial officer, Kevin Wills, who has a background in M&A.

“Fashion comes and goes,” said Erwan Rambourg, an analyst for global luxury companies at HSBC Holdings Plc. “A multibrand strategy makes a lot of sense if you’re exposed to the fashion industry because it brings less volatility, more consistency. This can hedge your fashion risks.”

Coach, founded in 1941, has relied on its New York heritage and prestige to fend off European imports. Yet, sales began to dwindle in recent years amid competition from Kate Spade and Michael Kors Holdings Ltd. Since Luis took over in early 2014, the company has said it would close underperforming locations, introduce new products and refurbish stores. Coach also began selling less to department stores to avoid steep promotions that it said hurt the brand’s cachet. And it has beefed up its digital platform and marketing, most recently tapping actress and singer Selena Gomez as brand ambassador. 

Cool and Edgy

The moves are paying off. Helped by edgy designs from Stuart Vevers, Coach has posted three straight quarters of same-store sales gains -- despite a broader slump in the handbag industry. The growth followed three years of declines.

The company, whose shares have climbed 12 percent this year through last week, reports third-quarter earnings on Tuesday.

Coach is new to the M&A world. Its only purchase to date was the 2015 acquisition of designer shoe company Stuart Weitzman. That unit’s sales grew 15 percent to $345 million in the year ended July 2016 from $300 million in the year ended September 2014.

The multibrand concept is also relatively new in the North American affordably-luxury space, where Coach gets more than half of its sales. The approach is more common in Europe: LVMH, for instance, owns Louis Vuitton and about 70 other brands. Gucci parent Kering and watch and jewelry seller Compagnie Financiere Richemont SA each have about 19.

Quantity Versus Quality

But U.S. brands such as Coach have challenges that European counterparts do not. They don’t use retail space as efficiently, and U.S. consumers demand steeper discounts. There is about 7 square feet of retail space per capita in the country, compared with 1 square foot to 1.5 square feet in Europe, said Adrienne Yih, an analyst at Wolfe Research LLC.

The value-for-money culture has dominated American society, HSBC’s Rambourg said.

“This is a country of all-you-can-eat menus and refillable Coke,” he said. “If you pay full price, it’s an issue.” 

Coach has been trying to get shoppers to pay full price by making its brand more upscale, especially with the 1941 luxury collection. The line represents about a third of its handbag sales in its top-tier retail stores.

In another attempt to avoid discounting, the company is pulling its products out of more than 250 department-store locations in North America. That means revenue generated from such stores will drop further from the current 4 percent.

While Coach’s sales have improved, having multiple brands could drive growth, said Brian Yarbrough, an analyst at Edward Jones & Co.

“They’ve learned the hard way,” he said. “It helps to diversify.”

To contact the reporter on this story: Stephanie Wong in New York at swong139@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Lisa Wolfson

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