By Jinjoo Lee

High-end luxury brands may have taken their price increases too far. That is presenting opportunities for less-expensive brands.

Tapestry-owned Coach on Thursday reported that its revenue rose 10% on a constant-currency basis in its quarter ended Dec. 28 from a year earlier, well exceeding Wall Street expectations of 3.6% growth. Ralph Lauren's constant-currency revenue rose 11% over the same period, also exceeding expectations. Both Tapestry and Ralph Lauren saw healthy margin expansions and better-than-expected profits.

Price increases are in large part responsible for those strong margins. Coach handbag prices rose by a double-digit percentage last quarter. On Tapestry's earnings call on Thursday, Coach Chief Executive Officer Todd Kahn said pricing has risen in 19 of the past 20 quarters. Ralph Lauren, which also reported earnings Thursday, said pricing grew 12% in its latest quarter, following many quarters of price increases. The brand expects another high-single-digit pricing increase in its current quarter.

This is a contrast from higher-end luxury sellers, whose customers have been turned off by continuous price increases. LVMH's founder, Bernard Arnault, said on the company's most recent earnings call that a number of brands have "increased their prices in a somewhat extravagant manner" without justifying it with a change in the product. The sales of LVMH rose just 1% in its latest quarter.

Coach and Ralph Lauren's healthy expansion is notable because midtier luxury brands' market-share growth has historically lagged behind high-end sellers. This is partly because high-end luxury conglomerates are simply bigger and have the means to splurge on marketing. But their shiny reputation might have taken a slight hit after an investigation last year found that Dior paid a supplier 53 euros, the equivalent of $55, to assemble a EUR2,600 handbag.

Importantly, the American brands' humbler price point is resonating even on the home turf of their high-end luxury rivals. Tapestry and Ralph Lauren reported 42% and 16% constant-currency sales growth in Europe in the latest quarter, respectively. "We offer incredible value against maybe traditional European luxury.... And you're seeing it in markets like Europe, where we're seeing double-digit growth," Coach's Kahn said on its earnings call. American brands might also have a shot at getting a premium perception in Europe just because they aren't as exposed to the market and are seen as more scarce, according to Simeon Siegel, equity analyst at BMO Capital Markets.

That isn't to say all affordable luxury brands can win in this environment. The Michael Kors's parent company, Capri, said Wednesday that the brand tried to increase price points too quickly. Michael Kors's sales fell 11.7% on a constant-currency basis in its quarter ended Dec. 28 compared with a year earlier, sending shares plunging 10% following the report.

Coach and Ralph Lauren can get away with higher pricing because they have done years of work to elevate brand perception: pulling products out of cheap retailers, reducing discounts, and working on compelling products. Michael Kors has some ways to go: Its handbags had an average ticket price of about $450, but the out-the-door retail price was less than $100 in 2023 because of heavy discounting, according to evidence that emerged during antitrust court hearings. Tapestry agreed to acquire Capri in 2023, and the latter has likely been counting on that deal to close, rather than working on its stand-alone strategy. But the deal was terminated late last year after a federal judge sided with the Federal Trade Commission.

Coach still has room to push pricing further, as long as it can justify it with on-point variations on its classic designs. In 2021, the brand launched the so-called Pillow Tabby, which went viral on social media and currently retails for $550, $100 more than the original Tabby. Its signature bag designs sell at well under the $1,000 price tag that is considered an opening price point for true luxury bags.

There seems to be a strong market for bags around $1,000 or less. On a postearnings call discussion with analysts at Citi, Tapestry management said a version of Coach's Empire bag that sells for roughly $900 sold out and said there has been healthy demand for its higher-price products. Early demand for Versace's newly launched $1,000 Tag Bag has been "very, very strong," Capri CEO John Idol said earlier this past week.

Tapestry's shares are trading at less than 16 times forward 12-month earnings, while Ralph Lauren fetches about 20 times. They are at clear discounts to the European luxury conglomerates, which trade closer to the 25 times range. As long as the companies can keep finding the sweet spot between price hikes and product upgrades, more investors will want to snap up their reasonably priced stocks.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

(END) Dow Jones Newswires

February 08, 2025 06:00 ET (11:00 GMT)

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