Coach rolls dice with Krakoff luxury clothing line

By Martinne Geller and Nicole Maestri - Analysis

NEW YORK/SAN FRANCISCO (Reuters) - The decision by Coach Inc (COH.N) to launch a clothing line named for its creative director Reed Krakoff is a risky one, especially amid a global economic slowdown that may permanently alter consumers' desires for designer duds and high price tags.

While Coach's handbags became ubiquitous during the housing boom as consumers found themselves flush with cash and easy access to credit, the retailer is now introducing lower priced goods to appeal to newly frugal and budget conscious shoppers.

Chief Executive Lew Frankfort defended his company's plan to launch a luxury clothing brand, telling Reuters it was "a perfect time" as consumers rethink where and how they shop.

Analysts praised Coach for its strong balance sheet, methodical approach to managing its business, and strong stable of talented designers. But they cautioned that success in selling a handbag does not necessarily translate into success selling clothes -- even for a retailer as well regarded as Coach.

"Going into a totally new category, which is more challenging, less profitable and to do it in an environment like this, when there's already too many brands, that is extremely challenging," said Milton Pedraza, chief executive of the Luxury Institute. "It's definitely a sport that is not for the faint of heart."

EXPANDING REACH TO HIGH-PRICED CLOTHES

On Tuesday, Coach reported a lower quarterly profit that matched Wall Street estimates, but its shares fell after same-store sales trends worsened and some investors worried over its increased investment.

Coach said it plans to introduce a stand-alone brand next year called Reed Krakoff after its executive creative director. Krakoff, along with Frankfort, oversaw Coach's evolution from a utilitarian leather goods maker to a fashion brand whose products range from bags, jewelry and perfume to scarves, sunglasses and shoes.

"We believe the Reed Krakoff label will define new American luxury, which has a distinctive aesthetic at an attractive price point," Frankfort said.

Coach is funding the brand, which will be sold in a small number of stand-alone stores, and a limited number of boutiques and specialty stores. It will not be sold in Coach stores.

Like other fashion brands, Coach has seen sales and profits tumble in the recession as consumers curb spending. In response, it has rolled out a line of lower-priced handbags that will help cut its average handbag price from $325 last year to under $300 this year.

The new Reed Krakoff line expands Coach's reach into clothing, which will range in price from $495 to $1,195. The line also includes accessories, jewelry and handbags.

Coach sells a few limited-edition handbags that cost thousands of dollars, but the bulk of its higher-end bags still cost less than $900.

Pedraza said Coach has the skills and resources to execute a higher-end brand, just as Japanese car maker Toyota (7221.T) executed its Lexus brand.

But he cautioned that the market for designer clothing is "far more challenging and far more competitive" than handbags.