Can America Build a Luxury Powerhouse to Rival Europe’s?

(Bloomberg) -- The new 700,000-square-foot headquarters of Coach is a state-of-the-art campus in one of New York’s newest skyscrapers. Showrooms along a 15-story atrium look out over tourists walking the High Line, the elevated railroad track-turned-park, and terraces on the 23rd floor poke out from a dine-in cafe that offers sushi and sandwiches. There’s even a special chicken wing bar for staffers who don’t want the usual lunch fare. 

A lot of work remains to be done, though. The building occupies the southeast corner of the city’s new $20 billion Hudson Yards complex, and cranes have loomed around the 52-story glass tower since the brand moved in two years ago. Even now, the buzz of jackhammers and welding machines greet Coach’s 1,200 or so  employees each morning as they enter their pristine new office. 

Inside, a similarly radical restructuring is underway. Sales at Coach are just starting to recover after a disastrous three-year stretch from 2012 to 2015, when the label shed $928 million, or more than 18 percent, of its annual revenue. During that time, shares plummeted more than 62 percent, from an all-time high of $77.28 to $28.93. 

To restore the fading fashion house, the plan is to turn it into America’s answer to European luxury conglomerates such as Kering and LVMH, which run wide-ranging portfolios of brands. LVMH, the world’s largest luxury company at nearly $50 billion in annual revenue, owns everything from Louis Vuitton clothing and Veuve Cliquot Champagne to Guerlain perfumes, TAG Heuer watches, and Sephora cosmetics.

The man steering this strategy, perched in a corner office high above the Hudson River, is taking a page out of his former boss’s playbook. Victor Luis, a 52-year-old executive, ran two divisions at LVMH before joining Coach: fashion label Givenchy in Japan and Baccarat crystal glassware in the U.S. An immigrant from São Miguel, a little Portuguese island in the Atlantic, he has a master’s degree in international economics and, from the looks of it, a Ph.D. in swagger.

Since his promotion to the top job in January 2014, Luis has announced two acquisitions: a $574 million deal for women’s shoemaker Stuart Weitzman and, last July, $2.4 billion for Kate Spade, one of the brand’s nemeses. He announced layoffs, culled about a third of his domestic store fleet, and hired replacements for several high-level executives, including former brand chiefs Craig Leavitt and Wendy Kahn. He eliminated the Jack Spade menswear business. He has also severely cut down on promotional activity, such as flash sales and discounted merchandise, purposely hurting sales in the hope that it would wean customers off lower-priced fare.

Perhaps the most controversial announcement, at least for the millions of shoppers who buy Coach’s bags and wallets, occurred last fall, when Luis gave the 77-year-old fashion house a new corporate name: Tapestry Inc. The move signals that Luis is looking to reposition the company as an American LVMH, one that has evolved beyond “core fashion.” 

This year’s performance has been much better, with the stock up about 18 percent this year to $52.03 through Tuesday’s close. Coach, Tapestry’s biggest business at more than $4 billion, is coming off a strong 12-month run, with same-store sales, a key metric for the retail industry, turning positive over the holiday season last year. “The biggest question mark for us—and for me—was how much time do these things take?” Luis says. “Anxiousness? Short-term concern? Absolutely.”

A Brief History of American Luxury 

It wasn’t always like this. Coach was known as an originator of what’s called “affordable luxury.” The company began in 1941 as a leather goods workshop in New York that sold only men’s goods: bags, wallets, flask-holders. It didn’t sell women’s handbags until Lillian and Miles Cahn bought the factory 20 years later. Some of the label’s oldest pieces are still stored in its archive, deep in the labyrinth of its headquarters. They’re relics that designers now use to jog their creativity. 

Many of those bags were designed by Bonnie Cashin, who was hired in 1962 and is considered a pioneer of women’s sportswear. In her 12 years there, she transformed Coach from leather shop to fashion house. Her shoulder bags with interchangeable straps, bucket bags and clutches became mainstays, and her signature brass turn lock, which was inspired by the toggles on the roof of her convertible, is still used on many of the brand’s styles today.

In 1985, the Cahns sold the company to the Sara Lee Corp., a now-defunct consumer goods conglomerate, and Coach expanded quickly. It hit $100 million in sales by 1989 and made longtime executive Lew Frankfort its president. Appointed CEO in 1995, he spent the next 19 years turning Coach into a multibillion-dollar global luxury powerhouse. Head designer Reed Krakoff became a fashion superstar, thanks to runway-worthy leather goods that could also be sold to the masses—at much lower prices than European peers could offer. When Sara Lee spun off its leather goods business in 2000, Coach had just surpassed the half-billion mark in annual revenue.

Krakoff’s most lasting contribution came in 2001, when the label released a line of bags covered in interlocking Cs, a design that coincided with the very beginning of fashion’s logo craze: Abercrombie & Fitch had its logo tees, Gap had its logo sweatshirts, and Coach had its logo bags. The print was applied to premium leather satchels, as well as to its cheap nylon tote bags. In a little over a decade, Coach would grow into one of the world’s largest handbag labels, peaking at nearly $5.1 billion.

Frankfort and Krakoff left Coach in 2014. The company said that the CEO’s departure was part of a long-term succession plan and that it didn’t require an interim chief for the transition. Frankfort took a role as an executive-in-residence at private-equity firm Sycamore Partners. Krakoff, too, left before Coach had found a replacement. (He is now the creative head of U.S. jeweler Tiffany & Co.)

Luis spent eight years under their leadership and watched the empire they built come crashing, in a very literal sense. Coach’s old industrial building, at 516 West 34th St, has since been taken down. One executive kept a brick as a souvenir.

Six months after Luis became CEO, executives held an investor day to reveal their turnaround plans. It would get worse before it gets better, they said. A 2014 company-wide memo asked not to panic, even though sales would be down more than 20 percent for the quarter. “That’s not a pretty number,” says Luis. “Even if you know it’s coming, it never feels good.”

In Search of “Elevation”

On the bottom floor of Tapestry’s new headquarters, seamstresses and leatherworkers sit at sewing machines, churning out sample clutches and hobo bags among spools of bonded leather and rubber fleece. Upstairs, a squad of designers sketch at high desks, surrounded by sheets of fabric. Pin-up boards line the merchandising floor, a vast menu of styles for a brand that sells thousands of different products.

On the 19th floor is the glossy C-suite. Senior management has experienced near-total turnover under Luis, and new faces now run the company’s global supply chain, finance, international business development, and technology. All three of Tapestry’s labels have new top executives, each recruited from outside the company. Kate Spade is run by fashion veteran Anna Bakst, who came over from Michael Kors in late March. In April, Stuart Weitzman announced that its new boss was Eraldo Poletto, the former head of Italian fashion house Salvatore Ferragamo.

Coach CEO Joshua Schulman, who joined from Neiman Marcus Group last June, is the company’s longest-tenured brand chief. The former president of posh department store Bergdorf Goodman speaks conceptually about Coach’s “brand DNA” (a label’s most distinctive attributes), the impact of “omnichannel commerce” (selling seamlessly both online and in stores), and where each new handbag line fits into his theoretical product “pyramid” (higher margin items with a smaller market at the top; lower ones with a bigger market at the bottom). 

Coach has begun to diversify its offerings beyond handbags. It started selling ready-to-wear apparel, and it plans to expand into new product categories and grow its menswear selection, which accounts for about 20 percent of the business. Its merchandise now includes outerwear, jewelry, watches, scarves, and fragrances. Schulman is open to expanding into home décor and other segments, when the time comes.

“Elevate” is a word that Coach executives use on a near-constant basis, whether it’s elevated product, elevated price points, or an elevated brand. The average price of a Coach handbag was once under $300. Now, according to Schulman, the sweet spot for price is from $300 to $500. The Rogue, at $795, is Coach’s most expensive line of handbags. Made from glove-tanned pebble leather, it has detachable straps and suede lining and can also come in bold patterns and embellishments. It was designed with die-cut snakeskin tea roses and priced at an elevated $1,500 in the recent season.

In February, the brand welcomed celebrities and influencers to a runway show for Coach 1941, an upscale offshoot of its main brand, designed by creative head Stuart Vevers. “He’s taken the brand in directions that it had never been,” says Schulman. The catwalk itself was more abstract art than clothing showcase, presented as an eerie forest full of video monitors gone haywire. As the show closed, lights dimmed and strobes pulsed as the models hurried through the set. You couldn’t see the clothes at all—not that it mattered. This was about artistic credibility. 

“Maybe a shopper who buys a Fendi or a Dior might come in and buy Coach apparel or Coach footwear, because it does now have a luxury point of view,” says Erinn Murphy, an analyst at Piper Jaffray. “That customer would have never bought a logo-oriented Coach tote from seven or eight years ago.” 

More Brands, More Problems?

Tapestry’s other brands remain in recovery from a variety of ailments. Stuart Weitzman’s business largely relies on two styles: an over-the-knee, super-tall boot called the “5050” and a line of minimalist “Nudist” sandals with a delicate ankle strap. But if consumers aren’t wooed with compelling versions of those franchises for one season, it can mean disaster. Earlier this year, the shoemaker ran into production delays with new styles, forcing the company to admit that the issue will persist through next winter. On top of that, Tapestry ousted Stuart Weitzman’s creative director, Giovanni Morelli, in May, citing issues with his “behavior.”

With $1.4 billion in annual revenue when it was acquired, Kate Spade had different problems, primarily that it had torpedoed its own brand with constant online flash sales. As a more youthful, less serious brand, it sells sneakers covered in rose gold glitter, jacquard dresses in multi-color daisies, and giant, heart-shaped hoop earrings. But the label’s whimsical items were often too strange for luxury shoppers unwilling to shell out $300 on bags that looked, for example, like a giant cat’s head. Weak traffic at its outlet stores forced the brand to offer deeper discounts. Even worse, several seasons of inventory missteps hindered stores that failed to stock enough of the merchandise that people actually wanted.

Sales at Kate Spade fell 3 percent in the last period—its sixth-straight negative quarter—but that qualified as good news since it still beat analysts’ estimates, sending the stock up as much as 11 percent. In June, fashion designer Kate Valentine, better known as Kate Spade and co-founder of the label, died in an apparent suicide at her Manhattan apartment. Grieving fans had an “immediate heartfelt response” to the news, executives said, and shoppers bought up products bearing her name.

At first, Tapestry estimated it would see from $30 to $35 million in savings from the Kate Spade integration. Next year, it expects to hit from $100 to $115 million. Analysts see Kate Spade’s growth potential as an attractive opportunity, if its new owner is willing to shrink first and keep enduring months of bad results as it reduces flash sales. “If they have the discipline to see this through, then the reality is they’ll emerge better off at the end of the tunnel,” says Simeon Siegel, an analyst at Nomura’s Instinet. “It’s important to understand what was the healthy sales versus what was the extra dollar that management wanted to grab.” 

But if the company is to fulfill the promise of becoming an American luxury conglomerate, Tapestry will eventually have to spend billions more to acquire additional brands. Luis insists that the company must first fix Kate Spade before resuming the hunt. When it’s time, though, the company will be looking for labels in accessories, footwear, apparel, and outerwear to add to its offerings.

And he has no plans to stop at things you wear. “We’re very focused on our planning horizon, which tends to be three to five years, but that doesn’t mean there’s no opportunity for Tapestry, as a house of brands, to evolve well beyond the core fashion categories,” he says. “The opportunities are endless.”

In analysts’ and media reports during the past year, numerous brand names have been mentioned as potential acquisition targets: Burberry, Britain’s largest luxury label, as well as Barbour, Mulberry, and Longchamp, the French accessories brand. Italy has its share of attractive targets, too, such as Furla handbags and Canali tailoring. PVH Corp., owner of Tommy Hilfiger and Calvin Klein, is the closest thing to an existing American fashion multi-brand house, and it could potentially be in the mix as a buyer. But PVH is considered more a mid-range apparel seller than a glitzy luxury group.

Tapestry’s American competition won’t be so easily left behind. Last November, Michael Kors bought shoe label Jimmy Choo for $1.2 billion, its first foray outside its legacy brand. Famous for its Sex and the City stilettos that Sarah Jessica Parker loved so much, the pumps can cost $600 to $1,200 or more, making Choo higher-end than its new owner is. The addition gives Kors a strong foothold in footwear as the handbag war spills into shoes and clothing. At the time, Michael Kors CEO John Idol said the acquisition signaled the start of new strategy: to build an international group of luxury brands.

To contact the editor responsible for this story: James Gaddy at jgaddy@bloomberg.net

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