From overexposed to on-trend: Coach bets on fashion

Coach rides to Fashion Week

Welcome to the big leagues, Coach.

Fresh on the heels of tapping a new creative director and CEO, the affordable luxury brand is making its debut at New York Fashion Week in an effort to woo back shoppers from its more fashion-forward competitors.

The move comes in the face of declining sales and a dwindling "cool factor" for the label, which has been tainted by a large presence at outlet centers and its association among many as a "mom" brand. But analysts said the series of Fashion Week presentations, which begin Thursday on Manhattan's Upper West Side, should give the leather goods brand a credibility boost among fashionistas.

Source: WestportWiki

"This should be a no-brainer for Coach to do a show," said Citi analyst Oliver Chen. "It can help to increase brand awareness and add greater fashion credit to the brand."

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Once considered one of the hottest brands by the industry—which cited its popularity among cash-strapped consumers looking for a taste of luxury at an affordable price—Coach's sales have stagnated over the past two years. It has posted three straight quarters of same-store sales losses, most recently reporting a comparable-sales loss of 13.6 percent for the second quarter of fiscal 2014.

A big reason for the slowdown stems from the company's focus on expanding its outlet presence. Morgan Stanley analyst Kimberly Greenberger estimates that outlets represent about two-third's of Coach's North America sales. Even in light of slower traffic during the most recent quarter, the brand plans to boost its square footage in the off-price channel.

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"Outlets certainly enlarge distribution opportunity; however, we believe increasing discount products in the marketplace may not be congruent with the effort to restore brand equity," she said.

Coach's woes have been further dented by the growing popularity of brands such as Michael Kors and Kate Spade, which offer products at a similar price point, but are regarded as more on-trend.

Michael Kors on Tuesday said that in the third quarter of fiscal 2014. The feat was even more impressive given nearly every other retailer was forced to slash prices to capture market share during the competitive holiday season. Particularly troublesome to Coach was the Kors management's bullish tone on men's, which has been one of the relatively strong areas for Coach, Wells Fargo analyst Paul Lejuez said.

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"Kors clearly took share this holiday season and did not have to do so at the expense of margin," he said.

Kors shares hit a 52-week high of $93.18 on Tuesday following its report. Coach stock is trading below $45, a decline of 38 percent from two years ago.

Becoming more than just handbags

Under new CEO Victor Luis, who took over the role from 35-year veteran Lew Frankfort in January, Coach is evolving into a "lifestyle" brand—meaning it will expand its offerings from handbags and leather goods into categories such as clothing, accessories and footwear.

Its fashion show will particularly help Coach's marketing efforts during this transition, by educating consumers that Coach now offers products from head to toe, Chen said. It will also highlight the brand's new creative director, Stuart Vevers, whose experience at British fashion house Mulberry and LVMH-owned Loewe will up its fashion resume.

Following its most recent earnings report, exiting CEO Frankfurt said, "Stuart has been absolutely true to our underlying brand equities. The product is rich, it's elevated, it's original."

Vevers' product should also help boost average unit retail (AUR) prices at the label, which, in spite of its factory offerings, saw AUR rise 7 percent last year, led by growth in its above $400 and $600 price buckets.

Despite the potential upside to come from Coach's new offerings, Morgan Stanley's Greenberger remains equal weight on the company, saying that the positive steps it's taking could take several years to yield results. Wells Fargo's Lejuez, who has a 12-month price target between $44 and $48 on the brand, sounded a similar note.

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"In our view, Coach's problems aren't about correcting a fashion miss, but rather fixing the brand image over time," he said.

Chen, who has a buy rating and a $56 price target on the stock, was more bullish, and pointed out how quickly things have changed since Vevers arrived. He pointed out that the creative director was only named to his new role in June, and the brand has already made moves to up its cachet.

"It's a brand a lot of people like around the United States—they just need more reasons to buy it," he said.

—By CNBC's Krystina Gustafson. Follow her on Twitter @KrystinaGustafs.