New York—Coach Inc. saw its shares drop in early trading after the luxury brand reported its first quarter earnings, warning its North American comparable store sales would be down “by high single digits” through June 2014, the end of its fiscal year.
For the quarter ended Sept. 28, Coach posted net income of $217.88 million, down from $221.38 million in the previous year. Earnings per share were 77 cents, flat with the same quarter last year. Still, that was enough to beat analysts’ estimates by 1 cent.
Net sales decreased 1% to $1.15 billion, missing analysts’ estimate for $1.19 billion in sales. On a constant currency basis, sales rose 2% from the prior year.
Operating income was down 3% to $322 million, down 3%, while operating margin was 27.9% versus 28.6% reported for the prior year. Gross profit declined 2% to $827 million while gross margin narrowed to 71.8% versus 72.8%. Selling, general and administrative expenses as a percentage of net sales totaled 43.9%, as compared to 44.2% last year.
Missing with Millennials?
What particularly alarmed analysts were the further declines in U.S. sales due to increased competition from brands such as Michael Kors, Kate Spade and Tory Burch.
Total North American sales were down 1% to $778 million. North American direct sales declined 1% too with comparable store sales down 6.8%.
Chief Financial Officer Jane Nielsen told analysts on a conference call that Coach’s comp store sales would be down “be down by ‘high single digits’ for the rest of the financial year which ends in June 2014.”
“During the first quarter we achieved slight overall sales gains in constant currency, benefiting from our geographic diversity,” said Lew Frankfort, chairman/ceo. “We continued to drive excellent growth in emerging markets and Europe as well as in the men’s business and developing lifestyle categories, such as footwear. Importantly, we moved forward with our transformation initiatives across all consumer touch points—product, store environments and marketing—focused on addressing the competitive handbag and accessories category in North America.”
Internationally, sales rose about 9% on a constant currency basis. China continued very strong, with total sales up more than 35% and comparable store sales rising at a double-digit rate. In Japan, sales declined 2% on a constant currency basis, while dollar sales declined 22%, reflecting the weaker yen.
According to Victor Luis, president/chief commercial officer, Coach will be launching a limited edition capsule collection across all categories for holiday. “It will be supported by our new, fully integrated marketing campaign, Coach New York Stories, showcasing top fashion models, dressed in Coach, set against recognizable New York backdrops,” Luis said. “And we will soon be unveiling a new store concept in two key flagship locations in New York and Southern California. Our intent is to drive brand relevance and increase Coach’s resonance with our consumers.”
Some analysts believe Coach may have not have the same resonance with Millennials as it did with previous generations.
“I think where Coach has really struggled is the 20-35 crowd. They’ve left Coach and gone to Michael Kors and Kate Spade,” said Edward Jones analyst Brian Yarbrough.
While noting that Coach has been selling more clothing and footwear to make up for its narrowed handbags business, those lower margined categories may not offset the declines in the handbag business.