Coach banking on new bags at lower prices

An American flag flies at a Coach Inc. full-price store in Los Angeles, California July 29, 2008.

NEW YORK (Reuters) - While other consumer goods makers raise prices to offset soaring commodity costs, Coach Inc (COH.N) is navigating this stormy U.S. economy by offering more lower-priced items, its chief executive said on Tuesday.

The U.S. handbag maker is pricing select new products "more sharply," according to CEO Lew Frankfort, even though the new bags will be more innovative, with new materials and logos.

"We're taking shorter margins on these select products so we can give consumers excellent value when they're reluctant to spend," Frankfort said in an interview.

Examples of Coach offering stretched consumers more bang for their buck include a "Hamptons Signature Hobo" bag in signature jacquard fabric for $268, a "Hamptons Signature Carryall" bag in the same fabric for $298 and a leather version of the carryall for $348.

Coach has not abandoned its higher-end bags however. It lists a python Delphine handbag on its website for $4,000.

But the New York-based design house is also widening its array of small bags, wristlets and cosmetics pouches to accommodate shoppers who want to buy something but have less to spend.

"We see consumers trading down to lower-priced bags and accessories, absolutely," Frankfort said. "Not all consumers, but some consumers."

NEW STORES AHEAD OF PLAN

Frankfort said a strong performance at new stores helped operating profit margins top 37 percent in the past year.

"All of our new stores opened profitably. (They) are coming on track well ahead of plan, even during the consumer recession," Frankfort said.

Coach's margins are under pressure as more sales come from its discount factory stores, consumers buy more lower-priced goods at full-priced stores, and labor costs rise in China, where Coach manufactures its goods.

Its full-year operating margin is down from 38.0 percent in fiscal 2007, after improving from 35.1 percent a year before.

So Coach is not slowing its pace of new store openings, with plans to open at least 40 full-priced stores in North America this fiscal year, which began on June 29.

Of the 13 percent revenue growth it forecast for fiscal 2009, about 10 percentage points of that will come from new channels of distribution, Frankfort said, with the remainder coming from improved productivity.

As Coach seeks to open more stores, it is finding an advantage in the misfortune of others. As more struggling retailers fall into bankruptcy, a lot of new retail real estate has come onto the market.

"It is helping in malls over time," said Frankfort, explaining that Coach primarily negotiates with mall operators over large packages that could include as many as 30 store sites. "Certainly, our ability to negotiate better terms has strengthened."

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(Editing by Braden Reddall)