New York-headquartered Coach is a designer of accessories for women and men. Handbags accounted for 64% of Coach's $2.6 billion of sales for the fiscal year ended June 30, 2007, and accessories for another 28%.
Coach said the deal was driven by its desire to directly manage the ôsignificant growth opportunity with the Chinese consumer by gaining control of its distribution in this regionö. Coach will buy its retail businesses in a phased manner over the next year and has appointed Thibault Villet, Coach's president for Greater China, to lead these businesses.
The announcement of the deal coincided with the opening of CoachÆs new global flagship store on Queen's Road Central in Hong Kong. Including this store, Coach has eight stores in Hong Kong, one in Macau and 15 on the mainland.
ôOur agreement to assume direct operation of our retail business in Hong Kong, Macau and mainland China, marks the commencement of the next phase of Coach's growth in this critical region,ö says Lew Frankfort, the company's chairman and CEO, in a written statement. ôWe are now poised to build the third leg of our business in China, following our successes in North America and Japan."
Over the next five years Coach expects to open over 50 new locations in the region and its market research indicates that by 2013 the China, Hong Kong and Macau premium handbag and accessories market will likely exceed $2.5 billion û more than double its current size of $1.2 billion. The company added that it has set itself a goal to be one of the top three imported handbag and accessory brands, with sales of over $250 million and a market share of at least 10% by fiscal 2013, up from only about $30 million and 3% today.
Coach also said that it hopes to replicate the success it has had in Japan after taking control of its distribution there in 2001. Coach entered Japan in 1998 via a distribution agreement with department store operator Mitsukoshi. In 2001 Coach acquired its Mitsukoshi distribution and then established a 50/50 joint venture with Sumitomo to distribute its products, citing a need to more aggressively grow its presence in Japan. In 2005 it bought out Sumitomo and made Coach Japan a wholly-owned subsidiary. Coach has had an enviable record in the country and is currently the fastest growing imported handbag and accessories brand in Japan.
Coach is now ranked second in luxury handbags in Japan, following only Louis Vuitton. Its success is attributed to the time it spent to understand the Japanese customer, develop products specifically for the Japanese market, such as limited edition handbags, and an effective distribution strategy and network.
Coach will acquire the assets, including fixtures and inventory, of its current stores in the region in stages over the next year. Coach did not disclose the financial consideration for the deal but did say it expects the acquisition to be slightly dilutive to Coach's consolidated financial results in the near term.
ImagineX is a Hong Kong-based, closely held brand management and distribution company in business since 1992 and with a network in the Greater China area. It represents 23 brands in total, including Boss, Elizabeth Arden and Salavtore Ferragamo and its forecast turnover for 2007 is $250 million. ImagineX has been the distributor for Coach in the region since 2003 and will continue to provide support services to the company.
CoachÆs most recent quarterly results declared on April 22 were slightly ahead of expectations, with earnings per share up 19% compared to the same quarter of the previous year, reckons SeekingAlpha. Coach has now had 24 consecutive quarters of double-digit earnings growth. But analysts have been questioning whether Coach will be able to sustain its growth momentum as US consumer confidence slows and this impacts spending.
CoachÆs decision to run its own distribution in Greater China could be one way it intends to address a potential slowdown in US retail sales. It is enhancing focus on a region which is fast becoming critical for luxury brands and at a time when consumers in China are still spending, as the economy is far less affected by subprime woes. Indeed, in a January update on the stock, SeekingAlpha commented: ôHopefully one day [Coach] can expand in a meaningful way into China, which will certainly goose earningsö.
Coach, which trades on the New York Stock Exchange, rose 3.7% to $35.63 on May 28.
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