The couple strolling arm in arm into Coach's flagship Madison Avenue store on a winter evening has Lew Frankfort perplexed. He cocks his balding head, like a dog confused by a high-pitched noise. Theirs is just the sort of out-of-kilter pairing that stumps him: It strains the boundaries of his obsessive research into customer behavior and messes with his gut, which he considers pretty damned golden when it comes to knowing who will make a purchase and who will walk out empty-handed. But these are turbulent times in the land of retail, and even Frankfort, 62, the C.E.O. who transformed New York-based Coach from a stolid purveyor of leather goods into one of the hottest companies and highest-earning brands of the past decade, is aware that the rules are changing—and not entirely in his favor. Frankfort has spent 25 years building Coach, but in the past four months, he's watched the stock lose nearly half its value. That's why he's here on a chilly December evening, deep in the retail trenches, trying to peer into his customers' blessedly acquisitive souls, which right now means gauging what might happen with the couple that just walked in. (View slideshow.)

The man is tall and Midwestern-beefy, about 45, with scraggly hair beneath a navy baseball cap and no jacket over his polo shirt, despite the December winds. The woman is blond and leggy, her hair a bit too "done" for New York, her coat a Marc Jacobs from a few seasons ago. "Atlanta, maybe?" Frankfort says, struggling to nail their demographic.

He tracks them stealthily as they meander through both levels of the airy 10,000-square-foot boutique—the highest-grossing of the company's 277 U.S. locations—examining a $400 green leather hobo bag, a pair of ballet flats made of Coach logo fabric, a scarf in a jaunty pastel plaid. "They'll do it," Frankfort says. But his voice, a Bronx growl, is less confident than usual.

Five minutes later, the couple leaves empty-handed. Frankfort is deep in conversation with the store manager, inquiring about the day's receipts, but his eyes dart after them. "They didn't do it," he says to no one in particular as he watches the heavy doors close behind them. "Why didn't they do it?"

To be fair, Frankfort isn't the only person asking this $64,000 question; these are truly unhappy days for high-end retailers. With the subprime-mortgage crisis spreading into the general credit markets and consumer confidence foundering, investors are running terrified. Luxury retail and apparel stocks have been among the hardest hit, and forecasts for the rest of the year remain glum. "I doubt we've seen the bottom yet," says Dana Telsey, a onetime top-ranked analyst at Bear Stearns who now runs her own retail-consulting firm.

Coach may be particularly vulnerable. The company, which spent 15 years as a sluggish subsidiary of Sara Lee until it was spun off in 2000, is largely credited with creating the "accessible luxury" category of retail and currently has sales of about $3 billion a year. Since its initial public offering, it has increased its share in the highly fragmented U.S. market for handbags and leather accessories from a tiny sliver to a dominating 22 percent of total sales. (The next closest brand, LVMH's Louis Vuitton, has about half that.) Because of such rapid growth, Coach has come to epitomize many of the operational assumptions about retail that have emerged in the past decade: that the concept of luxury is elastic, that labels can succeed without a diva designer, that brands must control distribution at all costs and stick to narrow markets where they can dominate.

But some analysts and investors worry that the very strategies that made Coach's ascent so spectacular may compound its challenges in a declining market. The consensus is that elite brands like Vuitton, Hermès, and Gucci are less susceptible to a recession because their customers will still splurge, regardless of the economy's ebb and flow. European brands are more diversified, producing ready-to-wear clothing that can offset a decline in handbags and accessories. Coach, meanwhile, sells mostly handbags and accessories (and it doesn't do business in Europe, where it would be unlikely to gain traction on a continent that is home to so many high-end fashion houses, so even the strong euro won't help).

But it would be foolish to expect Coach—or Frankfort—to go gently into that good night. The brand has spent the past eight years becoming an increasing threat to its centuries-old competition, and its C.E.O. intends to push even deeper into the market, despite the uncooperative economic climate. This intention may go down in the books as a study in hubris, but it may also wind up as a primer on how to run a growth company in a bear market. Considering Coach's short but spectacular life as a publicly held company, it could be argued that if Frankfort can't navigate the current environment, few C.E.O.'s can.

"When everything is going your way, you can tell yourself you're a genius," he says over a cocktail in early January. "But you're a fool if you believe it. I have every confidence that we'll continue to be as relevant and strong as ever, that our strategy will win out. But the truth is that for many years the wind was at our back. Now it's in our face."

C.E.O.'s aren’t known for acknowledging vulnerability, but one of Frankfort's favorite topics of conversation is his nightmares. A tall, trim man who signs his emails "Peace" and wears closely cut three-piece suits with open-collar shirts, he offers extravagant details of the recurring visions of failure that jolt him awake several nights a week. He even brings the dreams up during meetings with his sales staff (he sees the discussions as motivational). In one nightmare that he's had for years, Frankfort wanders the northern New Jersey house where he and his wife raised their children, confused and frightened by opposing views from two windows: bucolic countryside in one, and the Bronx housing project where he grew up appearing in the other. In a second dream, which he initially had during a New Year's vacation with his family in St. Bart's, he is walking down Madison Avenue on his way to an important meeting when he realizes that he has nothing on his feet but fuzzy blue socks. He bangs on the glass door of Cole Haan—a rising competitor in the handbag arena—begging for shoes, but no one is there. Panic mounts; the feeling of his feet against the pavement is unbearable. He wakes in a sweat. "My shrink says that I'm afraid I'm not prepared," he says. "I guess it isn't hard to figure out why."

Until recently, Frankfort's failure dreams were likely regarded by employees as a reminder not to take success for granted. Coach, which is virtually debt-free, had seen 24 consecutive quarters of high-double-digit earnings growth. Since 2004, it has opened 94 new locations, along with dozens of discount outlet stores, all of which sent revenue soaring. The stock, which made its debut in 2000 at a split-adjusted $2 a share, increased 2,000 percent in just over six years. At the 2006 annual meeting, investors rose to their feet and applauded as Frankfort entered the room. That year, his compensation, closely tied to the stock price, was $44.4 million, in the same league as Wall Street giants like Lloyd Blankfein of Goldman Sachs and John Mack of Morgan Stanley.

This year, Frankfort is not likely to receive much of an ovation. Sales in stores at least a year old—considered the most important metric in retail—fell 1.1 percent last quarter, compared with an increase last year of 21 percent. Revenue and earnings growth both slowed, and foot traffic was off. Not long before the fourth-quarter numbers were announced, Goldman Sachs lowered its recommendation from "buy" to "neutral," sending the stock down further, and Wall Street Strategies, an influential independent newsletter, advised investors to limit their exposure. In July, when the company's fiscal year ends, Frankfort's compensation will return from the stratosphere, shrinking to about $3 million.

"I'm not a Teflon C.E.O.," he says over breakfast in his office, which is kept at an attention-focusing 55 degrees, even in winter. His shirtsleeves are rolled up, and a pair of reading glasses hangs from a long chain around his neck. "I'm not the sort of person who will cover up his fears by pontificating about things he knows nothing about or who'll act as though nothing bothers him. I don't think my vulnerabilities make me weak. I think, as our results have proven over the years, they make me smarter."

Frankfort joined the company in the late 1970s, as head of business development. His career path had been unusual; he earned a degree in political science from Hunter College, an M.B.A. from Columbia, and spent an unfulfilling year at an investment bank. He worked for the next 10 years in Mayor Ed Koch's administration, learning to measure results and streamline bureaucracies by running programs like Head Start. After being passed over for a promotion, Frankfort left and was introduced to Lillian and Miles Cahn, the Greenwich Village couple who founded Coach in 1941 as a manufacturer of men's wallets. Using baseball-glove leather to make sturdy bags, the Cahns, with the help of designer Bonnie Cashin, created a mainstream alternative to the psychedelic styles in vogue during the 1960s.

By the time Frankfort arrived in 1979, Cashin had long since departed, and the brand needed to be revived. In 1982, he opened Coach's first retail store, at Madison Avenue and 57th Street. By 1985, revenue had climbed from $6 million to $19 million, and Frankfort had been named president. Later that year, he engineered a sale to Sara Lee, which he chose because it was known for letting its far-flung divisions manage themselves. The Cahns retired and moved to upstate New York, where they ran Coach Farms, a maker of goat cheese that they recently sold.

Frankfort's financial rigor—inspired, he says, by practices he learned from Sara Lee—kept Coach growing into the early 1990s, and he was named C.E.O. in 1995. But by the end of the decade, its workmanlike products had been eclipsed by new styles from European designers like Miuccia Prada and Gucci's Tom Ford. The company's annual revenue, which had hit $540 million by 1995, started to drop. "They were changing women's relationships to their handbags," says Frankfort. "I realized that Coach had to be radically transformed to respond."

He saw a massive gap in the market between cheap, trend-conscious department-store brands and European designer models that cost upwards of $600. In 1996, Frankfort hired creative director Reed Krakoff, who had established himself at Tommy Hilfiger, to create bags that offered consumers a third choice—handbags that would be sold in beautiful boutiques by well-trained staff at prices of between $250 and $300. The result was not only a new incarnation for Coach but also the birth of the accessible luxury category in the $8 billion high-margin leather-goods industry.

Frankfort likes to say that Coach is a blend of "logic and magic," referring to the balance between commercial necessities and creative impulses. But logic usually wins out. Intense quantitative scrutiny has always distinguished the company from its more exclusive competitors, many of which get carried away by a designer’s inspiration and end up with beautiful, impractical products that languish on the shelves. At Coach, every aspect of every product is tested with methods that make traditional focus groups seem quaint. The company conducts nearly 70,000 in-depth interviews a year, often in simulated retail environments—sometimes in stores that are temporarily closed and filled with prototype products, and other times on storelike sets, where the entire shopping experience, beginning with the greeting at the door, is rated. As a result, each step in the retail process is codified, from the dress code of the floor staff to the merchandise displays, which are identical in all stores.

When research revealed that customers would visit the stores more frequently if items were introduced faster than the seasonal schedule typical in the fashion business, Frankfort and Krakoff decided they should bring out a significant new group of products every month, despite the added work. As a result, the average Coach customer started visiting every month instead of three times a year. "We leave nothing to chance," Frankfort says. "By the time we release a product, we usually have a good idea how well it will do."

From the beginning, Frankfort and Krakoff also dismissed the idea of developing an "it" bag, like the Prada mini-backpack, the Fendi Baguette, or the Balenciaga motorcycle carryall. "In a way, that iconic status is a negative," says Krakoff. "The bags get copied and they're all over the place, and then no one will touch them." Instead, the company concentrates on having four or five product lines at any given time, phasing silhouettes in and out over the course of a few years, with accessories and new colors added to the most successful lines. "Reed has a very commercial sensibility," Frankfort says, "and that's my highest compliment."

But as both men admit, it is precisely that sensibility that makes Coach controversial within the fashion industry. European rivals don't bother masking their contempt. Frankfort says that one such rival recently referred to the company as the "McDonald's of luxury." That attitude may be a response to how Coach has stolen massive market share in North America as well as in Japan—where it overtook Gucci and is now second only to Vuitton—but it is also a visceral reaction to the brand's very DNA.

Coach is, in a word, American—not merely in its address but in its intent, with all the allusions the term encompasses. François-Henri Pinault, the C.E.O. of PPR, which owns the Gucci Group, may occasionally peek into the Paris boutiques of his top brands, but it's hard to imagine him blithely buttonholing customers as Frankfort does in his stores on a regular basis, shaking their hands and asking them where they're from and who they're shopping for. Frankfort likes to say that his products are a "good value," words that have probably never passed the lips of his European rivals. He insists that the quality is comparable, that Coach uses leather from the same sources and hardware that is just as sturdy. Krakoff claims that his designs often start trends for which the other brands are later lauded in the fashion press. In Krakoff's mind, only one thing separates Coach from the European luxury brands: Their bags are stitched by artisans in places like Florence, Italy, while Coach assembles its products in low-cost venues like China.

To his competitors, that's the point. The essence of Bottega Veneta, whose handbag prices start at $1,500, "is the people in the workshops," Tomas Maier, who designs the line for the Gucci Group, recently said. "They are artists. You can't get that kind of perfection in a place where people are paid $3 a day."

Fashion executives also snipe that while Coach may have mastered the semiotics of luxury—from elegant boutiques and attentive salespeople to the brand's chocolate-brown gift boxes and logo of a horse-drawn carriage, suggesting a venerable heritage—the ubiquity of the line renders it a pale imitation. With no apparel on the runway and therefore no cohesive image into which the accessories fit, the brand's detractors say it merely exploits the handbag lust carefully created by the European lines.

To such critics, luxury cannot exist without exclusivity. Gucci, for example, has 45 U.S. stores, in places like Beverly Hills; Palm Beach, Florida; and New York's Westchester County. Many of its bags cost more than $1,000, and the least expensive goes for $525. Coach has stores in those upscale sites as well, but in November, when it opened its 270th location, it was in Allentown, Pennsylvania, where the average bag sells for less than $300 and entry-level shoppers can find a key chain for $17.

Frankfort is fine with the contrast. "When I dreamed about what Coach might become," he says, "I dreamed it might be the egalitarian Louis Vuitton. Where they were exclusive, we would be accessible. Where they were pricey, we would be affordable. Where they were snooty, we would be friendly. To people on Park Avenue, having a Coach bag may not be an event, but for many people in America, it is something very special that makes them feel they've really accomplished something." Such distinctions among brands are sometimes more a matter of marketing spin than reality. For example, Louis Vuitton racks up the majority of its sales from its least expensive bag (in basic canvas) but tends to soft-pedal that fact, emphasizing instead the label's pricier, more cutting-edge designs. Coach, conversely, has tried to burnish its image by producing a tiny number of expensive items in recent years—such as a $2,300 embroidered hobo bag and an $8,000 purple lizard shopping tote—and showcasing them in only a handful of stores in premium locations.

While Coach may have expanded rapidly during the past decade by targeting the aspirational middle class, that growth will prove difficult to sustain in a slowing economy. The company now sees sales rising at its factory outlets and falling at its full-price stores, while sales slumped over Christmas as shoppers traded down to low-end items. The company's current expansion—it plans to have a total of 500 locations in North America by 2013—could prove dicey if economic woes continue. With existing stores in the nation's top 200 markets, Coach is now headed for outlying regions with shakier economies, like Limerick, Pennsylvania, and Witchita, Kansas. Still, Frankfort has not closed any stores and has not scaled back growth plans.

Which means Coach must begin a more serious courtship of the truly fashion forward—the girls who wear shoes by Christian Louboutin or Jimmy Choo and wrap themselves in a Balenciaga cardigan or a Dior bolero. These are the young celebrities and socialites who can make or break a brand by slinging a tote at a movie premiere, and in the past decade they have transformed the European luxury brands into cash machines. The influence these celebrities wield can be far more significant than the money they spend, which is a sliver of a company's sales. Their imprimatur can attract the shoppers just below them on the fashion ladder: the army of upper-middle-class suburban women who balk at dropping $2,700 for an Alexander McQueen python clutch but might spend $500 or $600 on a soft leather melon-colored hobo bag to impress the girls at tennis and make the cleaning lady swoon.

In taking this approach, of course, Coach will be battling even more fiercely with its higher-priced rivals—along with competitors like Cole Haan and Juicy Couture that now want a piece of the accessible-luxury market. Krakoff, who lives in a $17 million townhouse and collects outré French contemporary furniture, already courts the glamour girls around town and the fashion press. (Coach's huge ad budget, about $47 million in 2007, also helps.) And he's likely to step up his efforts. Krakoff recently collaborated with celebrity stylists Estee Stanley and Cristina Ehrlich—who design their own line, Miss Davenporte, and outfit Penélope Cruz and Eva Mendes—to create a limited edition of 100 Coach bags priced from $498 to $1,200, to be sold only at Ron Herman's boutiques in Los Angeles. The line made its debut in January and soon sold out.

In April 2007, Coach announced that it would discontinue bulk sales to corporations that used the products as company gifts, a move that sent the stock down 5 percent overnight but is considered a strong step toward shoring up the brand’s prestige. Frankfort also says that more focus will be placed on the company's boutique on Bleecker Street in Manhattan's West Village, intended as a laboratory for the brand's highest-priced items. Members of the fashion media will likely receive a flurry of press releases about new offerings there, like the $2,100 ostrich version of the Hamptons bag, but shouldn't expect any email alerts about most of the other 40 locations that are scheduled to open, primarily in malls, this year. "They don't need to know we have a store in Peoria," says a top executive.

And like all his rivals, Frankfort is looking to the East. The company's next targets are China—Coach opened its 15th store in the country last year—and Russia, where a location debuts this month in Moscow. It already has boutiques in Saudi Arabia, Canada, and Australia, along with more than a dozen other countries, and it hopes to generate 35 percent of its sales outside the U.S. by 2010. But it's worth noting that Coach lags behind its competitors in infiltrating developing markets. For now, at least, those countries contribute little to the company's overall sales. LVMH, by comparison, already gets a quarter of its revenue from outside the mature economies of North America, Europe, and Japan.

As he waits for these international efforts to pay off, Frankfort must keep his current investors happy. He has been buying back stock with the large amount of cash the company has on hand and may even institute a dividend—an unusual move for a retailer but one that his more strategic big investors have been lobbying for. "I was meeting with some very smart people who hold big stakes, and they asked me if I would consider a dividend," he says. "When it's come up in the past, we've dismissed it, but this time I asked them how I would do it within the financial structure. They had interesting things to say, so we're looking at it."

Frankfort and his management team have also cut costs—generally not a technique used by luxury companies. The company's holiday party for employees' children was held one morning in mid-December, in an empty room in the nondescript loft building the company has occupied since the 1960s. The entertainment was Frankfort's Labradoodle, Benvolio, and a slightly bedraggled Santa. Four boxes of cereal, a stack of plastic bowls, and a carton of milk were set up on a table in the corner. "You could feel the love, right?" Frankfort asked a few days later. "That's what Coach is all about."

In his early days at the company, as a 31-year-old with a résumé heavy on public service, Frankfort used to drive by the legendary apartment towers that line Central Park West on his way to work. In September, he moved from his suburban New Jersey home to one of the four fabled bell-tower flats in the Beresford, a 1927 Emery Roth landmark along that route. Frankfort and Bobbie, his wife of 32 years, had purchased the 6,500-square-foot, five-story penthouse, which was listed for $14.5 million, in 2004 and spent more than three years on a radical renovation. The apartment has unobstructed views of the entire island of Manhattan from wraparound terraces and a fully outfitted private gym tucked into the renovated belfry. Not surprisingly, Frankfort oversaw the project himself.

He seems simultaneously awed, proud, and slightly embarrassed by it all, not fully comfortable with the trappings of corporate success. He and his wife are active in philanthropy—mostly educational causes—but they don't collect art or make the rounds on the black-tie C.E.O. circuit. He dismisses the mere idea of hobnobbing with other Masters of the Universe. "You've got to remember that this came to me very late," he says. "Not like someone who inherited a company or those guys who make millions on Wall Street before they're 30." We're standing on Broadway, a few blocks from his apartment. He has no coat, but the wind doesn't seem to bother him. "When I was 50, my net worth was $2 million. I figured, Wow, if I can leave my kids an estate worth $10 million someday, that would be fantastic. I didn't spend my life thinking I needed all this. That's not what my goal was."

The parallels between Coach's rise and his own are hard to miss. Both had plain, sturdy beginnings and reached unexpected heights against competitors with better pedigrees. And in a slowing economy, both face tests that will prove whether those achievements were mostly a matter of good timing. Frankfort's nightmares of failure may persist—he expects them to—but so will his waking dreams. As the winds howl past us down Broadway, he talks of potential alliances. He's never mentioned it publicly before, but the words tumble out. "We could do a huge strategic acquisition," he says. "People have come to us to look at things like Bally, but that doesn't interest me—too small. Maybe Tiffany or Armani." His dream deal: a merger with Ralph Lauren. "The coming together of two quintessentially American superbrands, both up from nothing," he says rhapsodically. "Now wouldn't that be something to say you had been part of?"

The suggestion that a recession could put those dreams on hold has not crossed his mind, he insists. "We haven't reached our peak. This is going to be a growth company for the next several years. It may not be as easy now, but we've built an amazing machine."

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Luxe Lessons
How three upper-tier retailers are dealing with the economy.

Cole Haan
The leather-goods brand, owned by Nike, is going upmarket, offering new accessories in exotic skins like python and handbags that cost as much as $2,950.

Tumi
The luggage company brought in Nautica founder David Chu as creative director. He designed Tumi's first line of handbags, priced as high as $900, and a jewelry line may be in the works.

Tiffany & Co.
Conversely, Tiffany is opening smaller stores that sell lower-priced items—including jewelry starting at $100 and no engagement rings or expensive stones. —Megan Angelo