Tue Jul 28, 2009 7:05pm EDT
NEW YORK/SAN FRANCISCO (Reuters) – The decision by Coach Inc to launch a clothing line named for its creative director Reed Krakoff is a risky one, especially amid a global economic slowdown that may permanently alter consumers’ desires for designer duds and high price tags.
While Coach’s handbags became ubiquitous during the housing boom as consumers found themselves flush with cash and easy access to credit, the retailer is now introducing lower priced goods to appeal to newly frugal and budget conscious shoppers.
Chief Executive Lew Frankfort defended his company’s plan to launch a luxury clothing brand, telling Reuters it was “a perfect time” as consumers rethink where and how they shop.
Analysts praised Coach for its strong balance sheet, methodical approach to managing its business, and strong stable of talented designers. But they cautioned that success in selling a handbag does not necessarily translate into success selling clothes — even for a retailer as well regarded as Coach.
“Going into a totally new category, which is more challenging, less profitable and to do it in an environment like this, when there’s already too many brands, that is extremely challenging,” said Milton Pedraza, chief executive of the Luxury Institute. “It’s definitely a sport that is not for the faint of heart.”
EXPANDING REACH TO HIGH-PRICED CLOTHES
On Tuesday, Coach reported a lower quarterly profit that matched Wall Street estimates, but its shares fell after same-store sales trends worsened and some investors worried over its increased investment.
Coach said it plans to introduce a stand-alone brand next year called Reed Krakoff after its executive creative director. Krakoff, along with Frankfort, oversaw Coach’s evolution from a utilitarian leather goods maker to a fashion brand whose products range from bags, jewelry and perfume to scarves, sunglasses and shoes.
“We believe the Reed Krakoff label will define new American luxury, which has a distinctive aesthetic at an attractive price point,” Frankfort said.
Coach is funding the brand, which will be sold in a small number of stand-alone stores, and a limited number of boutiques and specialty stores. It will not be sold in Coach stores.
Like other fashion brands, Coach has seen sales and profits tumble in the recession as consumers curb spending. In response, it has rolled out a line of lower-priced handbags that will help cut its average handbag price from $325 last year to under $300 this year.
The new Reed Krakoff line expands Coach’s reach into clothing, which will range in price from $495 to $1,195. The line also includes accessories, jewelry and handbags.
Coach sells a few limited-edition handbags that cost thousands of dollars, but the bulk of its higher-end bags still cost less than $900.
Pedraza said Coach has the skills and resources to execute a higher-end brand, just as Japanese car maker Toyota executed its Lexus brand.
But he cautioned that the market for designer clothing is “far more challenging and far more competitive” than handbags.
Coach said investments, including the Reed Krakoff line and its expansion in China, will reduce earnings by about 5 cents per share in fiscal 2010, or about the same amount as in fiscal 2009, which ended in June.
Independent retail analyst Jennifer Black said Krakoff, who joined Coach in late 1996, has been key to Coach’s creative evolution, and that the risks for Coach include not only the money it is investing, but also the potential to divert his attention away from the core brand.
“Does he plan to be as involved as he was in the Coach brand?” Black asked.
Krakoff, who has a degree in Fashion Design and a Bachelor of Arts in Economics and Art History, has worked for Anne Klein, Ralph Lauren and Tommy Hilfiger. He has published several books of photography and is involved with New York’s Cooper Hewitt Museum and Whitney Museum.
Coach executives, who are known in the industry for doing extensive data analysis and market research, said there are separate design teams for Coach and the Krakoff brand and that Krakoff has already been splitting his time for a year.
“We’re very pleased with his ability to handle both responsibilities,” said Frankfort, adding that Krakoff’s line will complement, rather than compete with, Coach merchandise.
Needham & Co analyst Christine Chen said most designers like to pursue personal ventures, and she dismissed concerns that the new line will drain creative energy from Coach.
“Great designers can multitrack. Look at what Marc Jacobs has done for both his own line as well as Louis Vuitton.”
She also cited Karl Lagerfeld having his own business while designing for Chanel, and how Prada and Gucci began as handbag makers but now have successful clothing businesses.
“I think this it’s going to be a very smart yet contained effort at pursuing additional profitability,” said Barclays Capital analyst Robert Drbul. He said Coach has successfully introduced more expensive — and more profitable — handbags over time.
By Martinne Geller and Nicole Maestri; additional reporting by Ben Klayman in Chicago; Editing by Matthew Lewis, Phil Berlowitz