A rapidly shrinking luxury market has been devastating to upscale retailers and consumer goods product companies. Years of hasty growth was fueled by middle-class shoppers binging on credit cards and tapping home equity to peer over the barrier that separated them from the wealthy.

IN PICTURES: 6 Major Credit Card Mistakes

Hitting The Brakes
The credit-bubble collapse has brought Coach's (NYSE: COH) double-digit growth to a screeching halt. In its first quarter, sales dropped 1% to $761 million and net income fell 3.5%. Expansion and the launching of a new product line helped improve North American store sales by 8%. However, indirect sales plunged 33% as department stores like Macy's (NYSE: M), Nordstrom (NYSE: JWN) and Saks (NYSE: SKS) tightened inventory levels after having to heavily discount and send leftovers to bargain outlets like TJ Maxx (NYSE: TJX).

In an attempt to rejuvenate anemic sales, Coach is tailoring its business model around the "new normal" notion that economists and investors have referred to recently. After all, it's a natural instinct for management to rush out and adapt to the changing consumer landscape. Handbag selections ranging from $200 to $300 were broadened, and overall pricing strategies have been re-established.

Poppy Won't Pop Growth
The new Poppy collection, a budget-friendly concept consisting of products with price points ranging from $198 to $598, is targeted to frugal fashion enthusiasts. Management views it as an outlet to regain some of the lost "wanna be upper class" shoppers it lost throughout the recession. In my opinion, however, this comes across as a desperate attempt to buoy near-term sales and could have a long-lasting damaging effect on the brand.

Like CEO Lew Frankfort, you may disagree, as Coach's Q1 reports suggest the brand was well-received. And I'm not necessarily doubting that initial sales will be strong. Young girls will likely gush over the new products that fall into their spending budgets.

The problem stems from the fact that the Coach brand stands for expensive sophistication - not value-oriented and chic. Skimming Poppy's offerings, the products appear tacky, and the edgy look clashes with traditional Coach merchandise. In the end, this may drive away some of Coach's older, more loyal and deeper pocketed customers who purchase Coach for its classy image. The new line introduces the possibility of brand confusion among consumers.

China: Always The Answer To Growth
Despite criticizing Coach's domestic business strategy, I do think the company has an exciting growth story overseas - specifically in China. While the numbers have yet to be confirmed, management estimates that imported bags and accessories in China grew 40% in the Q1.

The good news is that sales in China still represent a very small portion of Coach's overall revenue. Given that management can properly penetrate the Chinese consumer market, there is vast potential in the region. Currently, brand awareness clocks in at just 8% in China. That's compared to 72% in the U.S. and 63% in Japan.

Bottom Line
Despite being critical of Coach in this analysis, I do like the company. I certainly question its adaptation strategy to the recession and whether it will impact the company's brand image. However, Coach produces a superior product, and flashing a product endorsed with the Coach name remains a symbol of status - an attractive quality that generates favorable long-term prospects.

Based on ratio analysis, I don't necessarily think Coach is attractively priced at 16 times forward earnings, particularly given a risky near-term outlook. My recommendation is for owners to hold on to shares, but for those shopping around for shares to wait for a better deal. (For more, see Analyzing Retail Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  5. Stock Analysis

    Are U.S. Stocks Still the Place To Be in 2016?

    Understand why U.S. stocks are absolutely the place to be in 2016, even though the year has gotten off to an awful start for the market.
  6. Investing News

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  7. Investing

    Retirees: 7 Lessons from 2008 for the Next Crisis

    When the last big market crisis hit, many retirees ran to the sidelines. Next time, there are better ways to manage your portfolio.
  8. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  9. Credit & Loans

    10 Reasons To Use Your Credit Card

    There are several benefits to paying with credit instead of debit, if you use a credit card responsibly.
  10. Credit & Loans

    5 Extreme Ways To Raise Your Credit Score

    Desperate to rebuild your credit score because you can’t obtain a loan with a decent interest rate? Here are some extreme options to try.
RELATED FAQS
  1. How can you pay your Walmart credit card?

    Holders of Walmart credit cards can make payments on their balances due by mail, online or at Walmart and Sam's Club stores. ... Read Full Answer >>
  2. Is Apple Pay safe and free?

    Apple Pay is a mobile payment system created by Apple to reduce the number of times shoppers and buyers have to pay for goods ... Read Full Answer >>
  3. Can you use your Walmart credit card at Sam's Club?

    Consumers can use their Walmart credit cards to shop at Sam's Club. However, they cannot use their Walmart credit cards when ... Read Full Answer >>
  4. How can you cancel your Walmart credit card?

    Walmart offers two types of credit cards: the Walmart MasterCard and the Walmart credit card. How to Close Your Walmart Credit ... Read Full Answer >>
  5. Does the Walmart credit card have an annual fee?

    The Walmart credit card does not charge annual fees to its cardholders. It does, however, have other fees associated with ... Read Full Answer >>
  6. How do NetSpend cards work?

    NetSpend prepaid MasterCard and Visa cards are popular prepaid debit cards requiring no minimum balance and no credit check. ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center