Coach Inc. Case Analysis

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Identification of Case Situation

Six years after deciding to be an independent public company in late 2000, Coach Inc.’s net sales had grown at a compounded annual rate of 26 percent and the stock price had increased by 1,400 percent due to a strategy keyed to a concept called accessible luxury. Coach crafted the accessible luxury category in women’s handbags and leather accessories by differentiating themselves on price, but matching competitors on styling, quality, and customer service. The accessible luxury strategy mirrors a focus (or market niche) strategy based on low costs. Coach concentrates on a narrow buyer segment and outcompetes rivals by having lower costs than rivals and thus being able to serve niche members at a lower price. Management believed that new products should be based on market research rather than on designers’ instincts. Coach utilized extensive consumer surveys and focus groups to gain insight in the market, and ultimately a competitive advantage over competition. Coach’s $200-$500 handbags appealed to both middle class consumers who now were able to afford a taste of luxury, as well as affluent consumers with the means to spend $2,000 on a handbag on a regular basis.

In addition to the above strategies, Coach Inc. has also adopted an aggressive growth tactic of expanding their company-owned stores in the United States and Japan. Going into 2007, Management expected to add 5 factory stores and 30 full price stores specifically in the U.S, and add at least 10 stores in Japan per year. By doing so, Coach hopes of taking advantage of their market potential.

Coach also entered into licensing agreements with Jimlar Corporation, Movado Group, and Marchon Eyewear in attempt to increase their network of retailers. Coach’s’ marketing executives hope to sustain impressive growth through monthly introductions of fresh new handbag designs and secure retail accounts in the rapidly growing luxury goods markets of Asia.

Management may want to focus attention on regulation on counterfeiting. Counterfeiting has been around for years and account for a 10 percent loss in sales annually, and will continue unless more strict penalties are enforced by host countries Counterfeiting creates large problems for the members of the industry when it comes to integrity and brand name loyalty.

Financial Analysis

Coach’s balance sheet and income statement are in great condition (See table 6.1-6.2). Between 1999-2006, Coach’s sales went from $500,944 to $2,111,501 (quadrupled), while the cost of goods sold went from $226,190 to $472,622 (doubled). Coach stock price has increased 1,400 percent since they became and IPO in 2000. Financial ratios from 2005-2006 were very similar, well above the expected industry standards (See Table 7). In 2006, Coach was very liquid with a current ratio, quick ratio, and working capital of 2.6, 2.17 and $632,658 respectively, indicating they are able to pay off liabilities without relying on inventories.

In terms of leverage, Coach is performing very well. As a general rule, a company’s debt-to-equity ratio should be less than 1.0, debt-to-asset ratio should be low, and times-interest-earned ratio higher than 3.0. Coach performs well in all three areas (see table 7), but may have too much cash on hand, and have been taking on more debt every year which may raise concerns.

Overall Coach has been in line with the industry averages, and also improving their ratios from year to year (or staying relatively similar). Coach has a lot of cash on hand and may want to consider investing money in R&D or expansion plans.

Five Forces

The luxury goods industry is quite competitive, with the strongest forces coming from rival sellers, substitutes, and buyers. On the other hand, competitive pressures from new entrants and suppliers do not have as much impact on the competitive nature of the luxury goods industry (see tables 1-5). The luxury goods...
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