Kate Spade, Coach struggle to get outlet shoppers to pay more

Shoppers walk past a Coach outlet store.
Luke Sharrett | Bloomberg | Getty Images

Handbag makers continue to preach about drawing the line on discounts.

Yet while they tighten the reins on markdowns at department stores and standalone shops, there's one place they haven't been able to shake the habit: outlet malls.

Kate Spade said Wednesday that weak tourism trends at its outlet stores forced the label to ramp up discounts there in the fiscal third quarter. Management blamed the brand's gross margin contraction on this "deterioration" in its outlet business, saying it also pressured its comparable sales results.

The company's comments came one day after Coach said it has ratcheted up promotions at outlets, and as both brands are working to wean shoppers off discounts.

Kate Spade shares fell 10 percent in afternoon trading Wednesday, as Coach declined some 2 percent.

"The [outlet] environment remains heavily promotional," Kate Spade CEO Craig Leavitt told investors.

Both Kate Spade and Coach emphasized last quarter that they would work toward selling more of their products without a discount.

For Coach, that meant exiting 25 percent of the wholesale locations where it did business. For Kate, it meant tweaking its assortment of novelty products to juice full-price sales at its branded stores.

Though Kate Spade management warned at the time that the brand would become more promotional at outlet malls, its third-quarter results there came in weaker than projected. In particular, traffic and subsequent purchases in tourist cities were weaker relative to local markets than they were the prior quarter.

Because Kate Spade has just 67 North American outlet stores, its footprint is skewed toward higher-volume tourist cities — meaning fewer international travelers hurt its results disproportionately.

If it weren't for its outlet business, management said the company's gross margin would have increased over the prior year, as it conducted a greater percentage of sales in its traditional stores without a discount. Its comparable sales likewise would have been stronger.

"We have seen a strong response from customers in our full-price business," Leavitt said, later adding there's "extremely low crossover" between its full-price and outlet customers.

While management expects tourist-related pressures on outlet stores to ease, the company is walking back its prior expansion plans. The brand now plans to operate roughly 100 North American outlet shops in the long term, down from its previous target of 125 to 150.

As for Coach, its heavy presence in outlet malls is one of the biggest knocks skeptics have about its prospective turnaround. While the label has successfully persuaded shoppers to pay more for its handbags at full-price stores, promotional levels in its outlet stores remain elevated.

"The greatest improvement [at Coach] is coming from full-price stores ... but full-price stores represent less than 15 percent of total sales by our estimates," Citi analyst Paul Lejuez told investors Wednesday.

Like its competitors, Michael Kors has taken a stand against promotions, saying it will no longer participate in certain broad-based sales events at department stores. Kors will report its fiscal second-quarter results next Thursday.

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