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If China Slows for Coach, Let's Hope Men Embrace the Bag

Stacey Widlitz|Retail Consultant and Independent Analyst
Monday, 23 Apr 2012 | 11:50 AM ET

With Coach shares hovering around an all-time high, it seems investors have put any worries about China on the back burner for now.

Chiaki Tsukumo

Although Coach’s business in China is still small at 5 percent of sales, investors view it as the company's biggest growth opportunity. Considering recent data points from LVMH and Burberry, investors will be listening very carefully for any hints of a slowdown on China's mainland when Coach reports earnings on Tuesday.

Last week, both LVMH and Burberry signaled growth in China moderated from previous quarters. While the two power luxury brands are still experiencing healthy sales in the region and there is no cause to sound the alarm bells, the growth trajectory did not go unnoticed.

LVMH saw sales in the leather and fashion category moderate to single-digit growth on the Mainland versus previous double-digit growth. In Burberry’s case, 20 percent growth is nothing to complain about, but that did slow from its previous pace of 30 percent.

Retailers, including Coach, have a lot riding on China. The company has accelerated store growth plans this year. And why not? Same-store sales have been increasing at a double-digit pace and brand recognition is on the rise.

And let's not forget the Indiana Jones satchel, or “man bag.” What better retailer to capitalize on the man bag trend in China than Coach? There is also the fact that men simply represent a bigger portion of the luxury spending in Asia. In China, for example, men represent as much as 50 percent of sales versus 15 percent for the rest of the world.

Just as important as local sales is Chinese tourism. For example, luxury flagships in London including Harrods, Selfridges and Burberry all suggest one third of sales come from the Chinese. On average, Chinese tourists drop about $4,000 when traveling, according to Harrods.

While LVMH sales in China might have been disappointing, the company did point out that including tourism, sales to China increased double digits. And with Chinese spending worldwide already at the No. 2 spot only behind the U.S., according to Bain Capital, everyone is vying for a piece of the action.

The JOLT Act in the U.S. may help speed up the visa process. That would be a huge win for retailers without a foothold in China. It would also encourage Chinese consumers to spend more abroad. If we continue to see decelerating trends on the Mainland combined with incentives to shop abroad that raises obvious concerns about retailers with an aggressive China roll out strategy.

Coach has quadrupled since recession lows. With concerns about slowing growth in China and a market share in the U.S. that seems hard to beat (not to mention Michael Kors heating up the competitive environment) investors will be looking for the next leg of the story.

That is exactly what Coach is going for with the men’s business in the U.S. Half of store growth this year is dedicated to men’s business, which is estimated to double this year to $400 million in sales. Who knows, maybe U.S. men will embrace their feminine side, strap on a man satchel and go all Indiana Jones.

Stacey Widlitz is the President of SW Retail Advisors Inc. She has worked at UBS, SG Cowen, Fulcrum Partners and in 2005 was one of three analysts to launch the Research Department at Pali Capital, where she covered Retail and Home Video for 5 years. Follow Stacey on Twitter @StaceyRetail.

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