Coach Profit Drops 32% For The Quarter

Like the majority of the luxury sector, Coach Inc. felt the effects of consumers' continued preference for necessities over discretionary purchases.

The company reported fourth quarter earnings fell 32% to $146M, or $0.45 per share, vs. $214M, or $0.61 per share in the fiscal fourth quarter of 2008. Income for the fiscal year 2009 was $623M, a 20% drop from earnings of $783M for fiscal year 2008. Earnings per share were $1.91 vs. $2.17.

Excluding one-time items, earnings per share were $0.43, meeting analysts expectations according to Thomas Reuters.

Fourth quarter sales dropped less than 1% to $778M from $782M in the previous year. Total Sales for the year were up 2% to $3.23B. Coach retail store sales, which account for 85% of its business, were up 3%. The biggest sales decline was in Coach's North American stores, where retail comp. sales slid 6.1% for the quarter and 6.8% for the year. Department store sales dropped 21% for the quarter and 19% for the year.

In response to sales declines, the company has increased their offering of handbags in the $200-$300 range to 50%. In an interview with The Wall Street Journal, Coach, Inc. Chairman and CEO, Lew Frankfort said the following:

"We want to be in that sweet spot where we believe the market will settle," Mr. Frankfort said. "It's our intention for the indefinite future to maintain pricing at [these] levels."

The new pricing strategy seems to be working. In a conference call, Mr. Frankfort said that the percentage of handbag sales in its North American stores has increased to 55% compared to 50% a year ago. The introduction of the new Poppy line, which has an average handbag price of $260, has improved retail sales for the month of July. The line, which is marketed towards Coach's younger consumer, is selling at a rate two to three times that of other collections.

Coach, Inc.'s Chief Financial Officer, Mike Devine said that fiscal 2010 will be an "investment year" for the company, with plans to open 20 retail stores and 6 outlets in North America, 10 stores in Japan and 15 new locations in China, where sales have been strong.

Included in the expansion is the creation of the Reed Krakoff label. Last month, Haute Retail mentioned that this new brand, revolving around Coach's creative director, was in the pipeline. The label will be a "global brand" separate from Coach that will include women's ready-to-wear, accessories, handbags, footwear and jewelry. "We believe that this concept will serve to define the new American luxury and engage a different customer who is looking for exclusivity and limited distribution", Mr. Frankfort said of the new label.

The Reed Krakoff label will debut in Fall 2010, with a limited number of stores in the U.S., Japan and Hong Kong.

Reuters reports that shares fell 7.2% due to investor worry about Coach's increased expansion of the brand.

"With increased investment spending in China, sales volatility here at home, lower-price points within the overall assortment and increased factory channel sales mix, it appears returns will take a hit," says Wall Street Strategies analyst Brian Sozzi. "The gross margin really missed consensus by a wide margin." (Source: Reuters)

But some analysts think the market overreacted.

Needham & CO analyst Christine Chen said she thought the market was reacting to the worse same-store sales number, but they were looking at the wrong thing. "They said July trends have improved due to Poppy," she said. "Investors should be a little more forward-looking." (Source: Reuters)

Coach shares dropped $0.38 to $28.05 at the close of the market.

Disclosure: Haute Retail has positions in Coach, Inc.