Coach Q3 Profits Rise as U.S., China Sales Increase

Actress Gwyneth Paltrow, here on a recent New York appearence for her book "My Father's Daughter," is the new face of Coach

Actress Gwyneth Paltrow, here on a recent New York appearence for her book "My Father's Daughter," is the new face of Coach

New York–Coach Inc. posted today a better-than-expected, 18% jump in fiscal third-quarter earnings as demand for its handbags and leathergoods increased in North America and China.

Coach, which has been posting double-digit profits as it expands internationally, also raised its quarterly dividend 50%.

For the quarter ended April 2, Coach’s net income increased to $186.02 million or 62 cents a share from $157.64 million or 50 cents per share in the previous year.

Net sales grew 14% to $950.71 million from $830.67 million reported in the same quarter last year. The report was better than analysts’ average estimate for 60 cents a share on sales of $949.07 million. Gross margin fell to 72.8% from 74.1%.

China: ‘Our Largest Geographic Opportunity’

Direct-to-consumer sales increased 15% to $832 million. Moreover, comparable store sales in North America were up 10.3% from a year ago. The company said its China sales—where it has 55 doors—remained “robust as point of sale sales continued to comp at a double-digit rate.” Indirect sales increased 14% to $119 million, up from $105 million reported in the prior year, reflecting “significant growth in shipments into U.S. department stores and international wholesale.”

Lew Frankfort, chairman and ceo, said, “Our performance—led by another quarter of excellent North American comparable store sales—demonstrated the brand’s vibrancy across channels and geographies.”

Furthermore, in China, “which represents our largest geographic opportunity, our sales are growing rapidly against a strong market backdrop,” Frankfort added. That strength in China has led to speculation in financial circles that Coach may also list shares in Hong Kong.

Disaster in Japan to Effect Q4 Results

Nonetheless, looking toward its fourth quarter, Coach said the effects of the March 11 earthquake and tsunami in Japan could lower its sales by $20 million and cut per share earnings by 2.5 cents. Coach’s Japanese business, which accounted for about 20% of its sales last year, saw comparable store sales fall 9% in the quarter.

In Japan, Coach opened four locations and closed one during the quarter, resulting in a total of 174 stores. But seven were still closed due to damage and four aren’t expected to reopen during this fiscal year. Coach also has a website in Japan.

Given the current conditions and projections, Coach forecast an impact of about $20 million or 2 percent to total sales and about 2 to 3 cents to earnings per share in its fourth quarter.

During the third quarter, Coach said it repurchased and retired 3.53 million shares at an average cost of $54.51 per share, spending a total of $192 million. At the end of the period, approximately $1.3 billion remained under the company’s previous repurchase authorization. Coach also made contributions a $21 million contribution to the Coach Foundation, and another $5 million to the Japanese Red Cross.

The quarterly dividend was raised to 22.5 cents from 15 cents, which will cost an additional $90.5 million a year.

Gwyneth Paltrow, Coach’s Latest Face

In other news, Coach confirmed that actress Gwyneth Paltrow will be the new face of the brand in its fall campaign marking the brand’s 70th anniversary. Reed Krakoff, president and executive creative director, called the Academy Award-winning actress “a natural choice…She embodies the spirit, energy and elegance of the Coach brand.”

Paltrow said she has a longstanding fondness for the brand: “I grew up in New York City and I’ve always thought of Coach as the quintessential New York brand…I’ll never forget getting my first Coach bag.”

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