Coach is taking after JC Penney: Analyst


After taking a beating from Wall Street for what experts considered a too-heavy outlet presence and an overly promotional strategy, Coach on Thursday revealed its plan to reinvigorate sales and restore its brand equity.

Along with plans to close 70 stores, the affordable luxury brand told investors at a shareholder meeting that it will cut back on its logoed product and wean customers off of discounts in its outlet business, after North America sales posted their fourth-straight same-store sales decline in April.

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But in a note to investors, Wells Fargo analyst Paul Lejuez said the handbag maker is "attempting something very difficult in trying to transform its brand, reduce promotions and attract new customers," equating the strategy to that employed by low-price department story J.C. Penney under ousted CEO Ron Johnson.

Source: WestportWiki

Among the similarities between the two brand's transformations, Lejuez wrote, are a team that has never before overhauled a company (Coach CEO Victor Luis was appointed to the role in January, while Johnson came from Apple), a discontinuation of "significant revenue drivers" (Coach's fall lineup will not include its Madison, Legacy or Poppy collections, which account for two-thirds of its handbag sales, while J.C. Penney "abandoned" its $1 billion-plus St. John's Bay brand), and a strategy that is being rolled out without extensive testing.

Also similar to J.C. Penney's attempt to bring in a new customer via more high-fashion labels, Coach is trying to bring in a more affluent customer by introducing a more fashion-forward product from new creative director Stuart Vevers.

"The problem is that we do not expect the more luxury customer will be as interested in Coach as Coach is in them," Lejuez wrote. "The bigger risk is that the core customer finds the new product too fashion forward and asks where 'my Coach' went."

Read MoreCoach slumps on worries of slow turnaround

Lejuez also questioned the brand's decision to be less promotional in the factory channel, where "competition is as fierce as ever." Analysts have said the brand's outlet presence accounts for about two-thirds of its sales in North America, but that its emphasis on that market has damaged its brand equity over time.

Can Coach swing a turnaround?

Morgan Stanley analyst Kimberly Greenberger said that Coach's decision to wean its outlet business is a step in the right direction, but it won't be a smooth transition.

"We think this is necessary to halt further brand damage but could present a challenging pathway to growth given the Coach shopper reliance on a promotional model," she said.

Read MoreCoach bringing discounts to full-price stores

Another way Coach has been criticized is for its heavily logoed product, which the company has said it is trying to steer away from. Citi analyst Oliver Chen sounded a positive note on the new product from Vevers, which hits stores this fall. Chen said the new product is attractive, includes better texture and more thrill.

Still, he called the brand's transformation a "layer cake of risk," because not only is it bringing in new product and trying to elevate its brand, but it will also revamp its store format over the next few years.

Coach shares touched a new 52-week low Friday, and are down nearly 40 percent on the year. They are down more than 55 percent from their all-time high, reached in 2012.

—By CNBC's Krystina Gustafson.