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Coach draws the line with department stores

It's about to get a lot harder to snag a discounted handbag at your local department store.

Coach on Tuesday became the latest accessories label to say that it's dialing back its presence in these highly promotional shops. The company this fiscal year plans to exit about 25 percent of the big-box locations where it sells its product, or roughly 250 stores.

The move comes as Coach is working to rebuild its pricing power with shoppers by incorporating more luxurious offerings in its assortment, including its recently launched 1941 collection. That brand has helped it grab shelf space in higher-end department stores including Nordstrom and Saks.

"We do want that channel to treat the brand rather consistently with the way we're doing it with our own retail [stores]," said Andre Cohen, Coach's president of North America and global marketing.

Department stores already accounted for a small chunk of Coach's sales, at roughly 5 percent, according to Wells Fargo. The brand's decision to reduce the level of markdowns these stores are allowed to place on its products makes for a natural exit point, Cohen explained. Coach will also exit low-volume stores that are below a certain sales threshold, he said.

During the fourth quarter, sales in these locations plunged at a mid-teens rate compared with the prior year. That's as its overall North American sales rose 9 percent. Both figures benefited from an extra week.

"This is very much a surgical move that is meant to drive the long-term sustainable health of our brand," CEO Victor Luis added, clarifying that wholesale will remain an important channel for introducing shoppers to the brand.

Coach is just the latest handbag label to dial back its exposure to department stores. Michael Kors, which generates an estimated 40 percent of its revenue in these shops, is likewise trimming the amount of product it's selling there. Over time, that should help the brand boost its margins, and make the overall handbag category less promotional.

Because it's a smaller brand, Kate Spade is still building out its wholesale network, including the addition of select mid-tier department stores. But CEO Craig Leavitt told analysts it's doing so "carefully" and on a market-by-market basis. As such, it's introducing the label at full price. During the first quarter, Kate Spade said traffic in department stores was soft. Still, it grew the average transaction size there through higher prices.

Yet Coach was able to sidestep one of Kate's biggest misses during the latest quarter — a pullback in the outlet space. The company said trends at these discount stores accelerated during the fiscal fourth quarter, with comparable sales coming in essentially flat.

Coach expects same-store sales at these locations to remain roughly flat moving forward, and hopes to pull back on promotions as traffic improves. Because outlet stores tend to be in tourist locations, they've been particularly hard hit by a stronger U.S. dollar and fewer inbound international travelers.

Getting the outlet channel right is critical to Coach's long-term success, as it accounts for roughly 40 percent of its sales, according to Citi. Moving forward, the label plans to offer more "disruptive" products exclusively for these stores, including a collaboration with Pac-Man this fall. The company also plans to grow its men's business in these stores.

Coach is likewise moving forward with renovations on its standalone stores, where same-store sales continue to outpace the rest of the fleet.

During the fiscal fourth quarter, Coach grew its North American comparable sales by 2 percent. That marked the first quarterly increase for that metric in more than three years. The company expects the brand to generate a low-single-digit lift in that metric here in the current fiscal year, as its turnaround takes hold.

It's also calling for double-digit growth in both net income and earnings per diluted share for the year. Still, its guidance came in below Wall Street's estimates, which pressured the stock on Tuesday. Also weighing on the company's shares were that its earnings beat came on the back of a lower-than-expected tax rate. The company earned 45 cents a share, compared with a Thomson Reuters consensus estimate of 41 cents a share.

Despite Tuesday's pullback, the company's shares are up nearly 25 percent so far this year.

"While the sales uplifts may seem somewhat anemic, it is important to note that they are being delivered against the backdrop of a falling number of doors through which Coach sells," said Neil Saunders, CEO of Conlumino research firm. "While disruptive, this corrective action is clearly delivering."