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Coach has become a luxury brand again — but Wall Street wants more

A Coach Inc. store in Chicago on Saturday, Aug. 5, 2017. (Christopher Dilts/Bloomberg News)
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Profits at Coach, the high-end handbag company, nearly doubled in the most recent quarter, to $152 million, as part of the company’s aggressive turnaround efforts.

But Wall Street had wanted more.

Shares of the company’s stock tumbled more than 14 percent Tuesday morning after executives warned investors that the year ahead may not be as rosy as analysts had hoped. Coach said it now projects revenue to grow 30 percent and earnings to increase about 12 percent to $2.40 per share. (Analysts were hoping for a 35 percent increase in revenue, and earnings of $2.49 per share.)

“The numbers are actually pretty good, but with Wall Street, it’s always about expectations,” said Neil Saunders, a managing director at research and analysis firm GlobalData. “Coach is improving, it has momentum and it’s going in the right direction, but perhaps not as quickly as Wall Street wants.”

Coach has become an unlikely comeback story. It has spent the past three years reinventing itself — weaning customers off ever-growing discounts, pulling out of struggling department stores and phasing out its ubiquitous logo bags — in hopes of restoring its cachet.

Along the way, it introduced a new luxury line, acquired shoemaker Stuart Weitzman and last month completed its purchase of Kate Spade, a brand popular among millennials for its whimsical designs and colorful patterns.

Millennials think Coach is ‘boring.’ Will acquiring Kate Spade help?

“All of these efforts have had an impact,” Saunders said. “Our data show that a growing share of affluent customers are shopping at Coach again, and the acquisition of Kate Spade gives the company even more room to grow.”

Coach, founded as a family business in 1941, originally specialized in leather wallets and billfolds. Its founders later expanded into women’s handbags, shoes and other accessories before selling the company to the Sara Lee Corp. in the mid-1980s. What followed was a period of rapid expansion, as Coach products began appearing on shelves in department stores across the country, including Macy’s. The brand quickly became known by its heavily monogrammed bags, which became ubiquitous in American suburbs.

But that popularity also meant Coach had lost its luster. It was no longer the high-end brand associated with well-made leather goods. Instead, it had become a mid-tier retailer with hundreds of outlet stores that hawked deeply discounted goods.

In recent years, executives have worked to build up the company’s leather business again.

“Three years ago we laid out an ambitious plan to transform the Coach brand, with a goal of increasing relevancy and improving consumer perceptions,” Victor Luis, chief executive of Coach, said in a statement. “During this time, we’ve done just that, by making the necessary and significant investments across all aspects of the Coach brand and business.”

It’s about to get a lot harder to get a discounted Coach or Michael Kors handbag

Now executives say those lessons will help them revive Kate Spade, which has fallen victim to many of the same pitfalls.

In the most recent quarter, sales dipped 1.7 percent to $1.13 billion from $1.15 billion a year earlier. Executives attributed that drop to a quarter that was one week shorter than last year. (Excluding that additional week, sales rose 5 percent.)

Profits, meanwhile, rose 85 percent to $152 million, or 53 cents per share, from $82 million, or 29 cents per share, a year earlier.

“This is a solid gain,” Saunders said. “The label is now back to a position of strength and is held in high regard by consumers. This is a marked turnaround from where it was a couple of years ago.”

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Millennials think Coach is ‘boring.’ Will acquiring Kate Spade help?