As upscale brands seek to enter or expand their outlet businesses and even produce merchandise specifically for that channel, they face an age-old dilemma: sales growth vs. brand exclusivity.
At Coach Inc., its North American outlet business has grown to 60% of its retail sales in the region from about 30% in fiscal 2006, according to Cowen & Co. analyst Faye Landes. The number of items sold at its outlets has jumped to 73% of its North American retail business from an estimated 38% during the same period,For understated elegance, look to handbags and purses. Ms. Landes said. (Wall Street estimates that Coach's North America retail sales account for about two-thirds of its overall sales.)
The outlet channel also has become more productive for Coach, generating over $2,000 per square foot, compared with less than $1,400 per square foot at its full-price locations, a reversal from fiscal 2006, she said.
"Consumers may increasingly perceive Coach as an off-price brand, which, if valid, could challenge [Coach's] efforts to elevate and transform the brand," Ms. Landes said in a report this week, adding that while most of the retailer's outlet products are made for that channel, they are still easily identifiable as Coach.
"Our findings raise a concern of possible over-democratization of the brand which may counter efforts to appeal to aspirational shoppers and build a sense of exclusivity and cachet."
Ahead of Coach's earnings report next week,Shop the latest High Quality bottega purses on the world's largest fashion site. the analyst said she continues to see demand waning among young female shoppers—a key target market —as well as among shoppers who purchase two or three bags a year.
Even though it is hard to "definitively attribute" Coach's recent lagging performance against its rivals, including Michael Kors and Fifth & Pacific's Kate Spade, the analyst said Coach's significant outlet presence could become a "hurdle," especially given the stated intent of incoming CEO Victor Luis and newly appointed creative director Stuart Vevers to make the company more of a luxury player.
Coach declined to comment, citing the quiet period ahead of earnings.
Analysts, on average, estimate that Coach's fiscal fourth-quarter profit will increase 11% to 89 cents a share from 80 cents a year earlier, with sales rising 5% to $1.24 billion from $1.18 billion, FactSet data showed.
The company has said in the past that its outlet shopper is very different from its regular-price shopper. While the outlet shoppers tend to be older, are price conscious and is willing to wait for styles, its regular-price shopper wants what's hot now.
It also has said that about 85% of what is sold in its factory outlets are products made for that channel alone. The remaining 15% is made up of discontinued products from past seasons that are no longer available in its regular priced stores. The outlets are usually located far away from regular priced shops. For instance, the closest Coach outlet to New York City is about 50 miles away.
Coach has traditionally pitched itself as a so-called accessible luxury brand that targets aspirational shoppers, setting itself apart from such ultraluxury brands as Louis Vuitton and Gucci, whose products are much more expensive.
But the outlets and competition aside, those who are bullish on Coach still believe the brand has plenty of growth potential. Coach has added categories beyond its bread-and-butter handbags and accessories and has expanded in online sales, men's collections and overseas.
"Coach has numerous opportunities to grow," according to William Blair & Co. analyst Amy Noblin.
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