Coach 3Q Profit Soars 37%; Looks To Europe For Expansion

A return to their affordable luxury price points has paid off for Coach Inc., as increased demand in North America helped the company to a strong third quarter.

Earnings for the leather goods maker jumped 37% to $158 billion from $115 billion from the previous year, beating Wall Street estimates, according to Reuters. Sales for the quarter topped off at $831 million compared to $740 million in fiscal 2009, with E.P.S. totaling $0.50 compared to $0.36 a year ago. As a result, the company doubled its cash dividend to $0.60 per share annually, implemented a $1 billion stock repurchase program, and upped its China sales target by a year.

"Our growth demonstrates our ability to manage our business nimbly, while investing prudently for the future". says Lew Frankfort, Chairman and CEO of Coach Inc.

Part of that investing includes the company's expansion into Western Europe. Via an agreement with French department store group, Printemps, Coach will open at least 14 locations in Printemps stores throughout France over the next three years, the first being a 1700 sq.ft. shop in Paris this June.  

Coach also entered into an agreement in principle to create a joint venture with British retailer Hackett Limited to open Coach stores in the U.K., Spain, Portugal and Ireland. The first locations in the U.K. and Spain are expected to open in the next twelve months.

On Thursday, Coach will celebrate the grand opening of its brand new Shanghai flagship store. The flagship is located on tony Huai Hai Middle Road, which is enroute to becoming the Fifth Ave. of Shanghai, with luxury brands such as Cartier and Tiffany & Co. pitching a tent there.

Shares of Coach closed at $42.03 with a 15 cents gain.

(Disclosure: Haute Retail holds positions in Coach Inc.

 

Photo: Coach Flagship Store in Shaghai/WWD

HR Quarterly Round-Up: Richemont, Burberry and Coach, Inc.

(Photo: Pascal Lauener/Reuters)

 

Richemont Sales Bolster Revival Hopes (FT): Richemont, the world's second-biggest luxury goods group, yesterday reinforced signs of a recovery in demand for expensive watches, jewellery and accessories with Christmas sales well ahead of expectations.

Burberry sales rise stronger-than-forecast 15% (Market Watch): U.K. luxury goods retailer Burberry reported a 15% rise in sales for its fiscal third quarter, sailing past analyst estimates, and the company said it now expects pretax profit for the year will reach the top end of market expectations.

Coach Profit Rises 11% on Holiday Sales (WSJ): Coach Inc.'s fiscal second-quarter earnings rose 11%, with a boost from holiday sales that improved over 2008's weak holiday season. Results beat Wall Street's expectations.

Coach 1Q Profit Dips As Sales Rise; Beat Wall St. Analysts Estimates

Coach Inc.'s new pricing strategy is starting to look promising, as the luxury accessories company posted FY 1Q profits and sales that beat Wall St. estimates.

The company reported a fiscal first-quarter earnings drop of 3.4% to $141M, or  $0.44 per share, vs. $146M, or $0.44 per share in the previous year.

Sales for the quarter rose 1.2% to $761.4M from $753M in fiscal 1Q '08. 

Analysts surveyed by Thomas Reuters expected $0.39 per share, and sales of $753.8M.

Lew Frankfort, Chairman and Chief Executive Officer of Coach, Inc., attributed the recent decision to revamp Coach's pricing strategy, and the introduction of the Poppy line, to this quarter's better-than-expected results:

“We experienced sequential improvement in our North American retail business this quarter, as the initiatives put into place earlier this year proved successful. Specifically, Coach benefited from the well received launch of the Poppy collection and other products at particularly compelling prices.”

Analysts also noted that Coach increased usage of 20% off coupons for their outlets stores, which helped to drive demand.

Direct-to-consumer sales, which include their China business, rose 10% to $654M for the quarter vs. $592M for the previous year. Total sales in Japan, Coach's second largest market, declined 3%, minus exchange rate fluctuations. Comp. sales in North American fell 1.1%, an improvement from the 6.1% decline in the previous quarter. China continued to show strength with double-digit same-store sales growth.

Indirect consumer sales, which represents 15% of Coach's business, dropped 33% to $108M as a result of reduced shipments to U.S. department stores.

As a result of the rapid growth the company is experiencing in China, Mr. Frankfort said Coach plans to open their first Mainland China flagship store in Spring 2010 in Shanghai. To help manage their growth in China, they also plan to open an Asian distribution center in Shanghai.

The company announced plans to open their first stand-alone men's store in NYC this Spring.

Despite beating analysts expectations, investors were apprehensive about the company's expansion, causing the stock to slip 2.8% during midday trading.

"Expectations for Coach have risen pretty noticeably, so anything that detracts from that basis is going to be viewed as a negative," said Wall Street Strategies analyst Brian Sozzi. (SOURCE: Reuters.com)

However, analysts remain upbeat:

"They're very well positioned to have a strong holiday," Needham & Co analyst Christine Chen said. "They should be able to return back to positive same-store sales ... because the product seems to be gaining traction with consumers." (SOURCE: Reuters.com)

For the holiday season, Coach plans to implement the same marketing strategy used to introduce Poppy, concentrating more on email campaigns, online ads, fashion blogs and social networking sites, like Facebook.
The company also plans to launch several new items including new accessory groups, Waverly and Gramercy, a new tote group, Alex and new Poppy items under $100.

Coach shares were down 3.2% to close at $33.41.

Disclosure: Haute Retail holds positions in Coach, Inc.

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.