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Coach snags new shoppers-at a cost

Victor J. Blue | Bloomberg | Getty Images

So far, so good. That's what Coach (COH) said Tuesday about its early read on the performance of Creative Director Stuart Vevers' first collection for its legacy brand, and for its strategy of scaling back on sales and promotions.

But with Coach shares falling nearly 6 percent in trading Tuesday, investors may need more convincing.

Wall Street analysts see the collection's success as a linchpin in the high-end handbag maker's turnaround. For several quarters, Coach's products failed to impress shoppers, and the company lost market share to competitors Michael Kors (KORS), Kate Spade (KATE) and Tory Burch.

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Early on, a number of analysts had concluded Vevers' debut collection was fashion-right, but there were concerns it might be too pricey for Coach's core consumer. Tuesday's results suggest that may be the case.

However, Coach executives appear optimistic about shoppers' early reception.

While the new collection has only been in stores about six weeks, the company has seen an "excellent response" across all price points for Vevers' first collection "and are definitely seeing more new customers," Francine Della Badia, Coach president of North American Retail, told analysts on the earnings conference call Tuesday.

She continued to say that anecdotally, Coach stores are telling executives that "early adopters of Stuart collection product are highly fashion engaged and new to the brand, buying multiple pieces."

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In other words, analysts fears could be correct. While analysts want Coach to win new customers, it shouldn't come at the expense of its core consumer.

Wells Fargo's Paul Lejuez said in a research note to investors, "The newer looking product does not seem universally accepted by the old Coach customer."

Della Badia also noted sales of handbags above the $400 price point are strong, with leather continuing to outpace logo-driven products.

Meanwhile, Coach eliminated the 25 percent off promotions it often ran at full-priced stores, moving to a schedule of semi-annual sales in January and June instead, which means there wasn't a big sale during the company's fiscal first quarter.

While revenue in the latest period fell 10 percent from the same quarter last year, Coach did beat Wall Street estimates for both profit and sales.

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"We have been too promotional as an industry" said Ron Frasch, operating partner at private equity firm Castanea Partners and former chief merchant at Saks. He explained, "a very quick trigger gets pulled with pricing strategies" that trains consumers to buy only at deeply discounted levels-and that can be unsustainable for long periods of time.

Coach CEO Victor Luis reiterated the launch of Vevers' first collection in September was a "significant milestone" in the transformation journey, which includes steps to cut costs, revamp product and pricing.

Vevers brought a strong pedigree of high-end retail experience to Coach, having worked for Bottega Veneta, Mulberry, Marc Jacobs, Givenchy and Loewe. Coach gave fashionistas and Wall Street alike a preview of his first collection in a New York Fashion Week showcase February.

Coach said it remains on track to launch Vevers product in outlet stores this spring, with only a small assortment available in outlets before the holiday season.

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It's a delicate step. There had been concerns that the popularity of Coach's outlets had cannibalized higher-margin sales at its retail stores. Morgan Stanley analyst Kimberly Greenberg estimates 70 percent of Coach's North American sales come from its outlets.

Without the new collection at outlets in the latest period, this important channel was soft.

Della Badia said traffic levels were weak at outlets in the company's fiscal first quarter, but expects the comparable sales trend to improve.

Key Banc retail analyst Ed Yruma thinks the transformation at Coach "will take time, but we believe that management is taking the right foundational steps to restore the brand."