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Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The prevailing macro economic conditions have given one of the hardest blows to the luxury sector. Consumers’ tight budgets and restrictions on spending have proven to be quite disheartening for high-end retailers. Industry players are struggling to cope up with the conditions and lure in high-spending customers.

The most striking feature of the competitive environment has been innovation and promotions. A company which promotes its products well and offers the lowest price takes away maximum market share.

Among all the luxury retailers, Coach (NYSE: COH) has been quite interesting to watch. It is one of those companies that managed to post remarkable quarters until it registered a lackluster second quarter last week. Let us check what exactly happened this time.

Efforts Fell Flat…

In spite of continuous efforts of launching new product lines and enhancing the men’s segment, Coach could not fight the effects of a tough environment. Its revenue increased slightly by 4% to $1.5 billion. However, it could not meet analysts’ estimates. A weak holiday season and customers’ unwillingness to spend affected Coach’s revenue from the American region.

However, strong demand in the international market, especially in China, drove revenue higher. China once again proved to be a sizzling market as customers are going gaga over the retailer’s high-end products. This led to a 40% surge in revenue from the region.

Another key driver during the quarter was the retailer’s expansionary moves. Its rapid expansion in various parts of the world, especially China and Japan, added to the top line. However, this is just the beginning. The company has yet to reap the full benefits of expansion. This can be a positive factor to watch out for in the months to come.

Competitive Analysis

A look at Coach’s stock price performance against its competitors will make the picture clearer. Peers such as Michael Kors (NYSE: KORS), Ralph Lauren, and Tiffany (NYSE: TIF) have performed better than Coach, as shown in the chart below:

<img src="http://media.ycharts.com/charts/52705f9d07de366df2f2698c16cfd8e8.png" />

COH data by YCharts

Clearly, Coach has been the worst performer in terms of return to investors in the last year. One of the keys reasons has been incompetent pricing of its products compared to other players.

Even Tiffany had a tough quarter, as it posted slowing sales and a lackluster holiday season. Its high-end customers preferred to stay away from the company’s stores, leading to a tepid performance.

However, other premium retailers, especially Kors, seem to be unaffected by any kind of economic problems. It has been a marvelous performer since its IPO and has managed to win customers’ hearts.  Kors’ innovative designs for all kinds of accessories are a customer delight, which has been driving its revenue as well as its stock price.  In fact, the company has been the hottest IPO since its inception in December 2011. An investor eying this industry can surely give it a try.

Conclusive Thoughts

On the competitive front, Coach has been very weak. Poor economic conditions need continuous strategic initiatives, which the retailer has failed to offer. In order to survive in a budget-conscious environment, Coach needs to make a few changes in its promotions. Until then, it is better to be on the sidelines and watch the company’s reaction to the current scenario.


justhimanshu has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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