Coach Posts Q2 Fall in Profit as U.S. Sales Continue to Falter

coachNew York—Shares of Coach Inc. slumped more than 7% in trading today after the handbag and luxurygoods brand reported a 16% drop in its second quarter profit on top of a 5.6% drop in sales.

For the quarter ended Dec. 28, Coach posted net income of $297 million, or $1.06 a share, compared with $353 million, or $1.23 a share, posted a year ago. And it was below analysts’ average estimate for $1.11 a share.

‘Disappointed  by Our Performance in North America’

Net revenue fell 5.6% to $1.42 billion missing analysts’ consensus for $1.5 billion in sales. International sales were up 2% to $425 million (up 11% on a constant currency basis) with sales in China growing 25% on track to hit $530 million this year. But sales in North America, which account for some 70% of Coach’s revenue, posted the third straight quarter of decline, falling 9% to $983 million. Direct sales in North America were down 8% with comparable store sales in its Coach stores down 13.6% “At POS, sales in North American department stores were slightly below prior year while shipments into this channel declined as planned,” Coach reported.

“During the holiday quarter, total sales fell slightly in constant currency as weakness in our North American women’s bag and accessories business offset strong growth in men’s, footwear, and robust results in emerging Asian markets and Europe,” said Victor Luis, chief executive. “We continued to be disappointed by our performance in North America, which was impacted by substantially lower traffic in our stores and by our decision to limit access to our e-factory flash sales site.”

For the second fiscal quarter, operating income totaled $436 million, compared to $527 million reported in the prior year, while the operating margin was 30.7% versus 35.0%. Gross profit totaled $983 million compared to $1.09 billion a year ago. Gross margin narrowed to 69.2% versus 72.2% reported in the prior year. And selling, general and administrative expenses widened to 38.5%, compared to the 37.2% reported in the year-ago quarter.

Analysts continued to point to erosion in Coach’s U.S. market share as the major factor in its sales decline. In particular, Coach appears to be losing share to rivals such as Michael Kors Holdings, kate spade and Tory Burch, all of which are expanding their retail networks.

According to Euromonitor International, Coach’s U.S. market share in handbags contracted from 19% to 17.5% between 2011 and 2012. Meanwhile, Michael Kors, for example, saw its share widen to 7% from 4.5%.

“These guys are definitely losing share. Fashionwise, they’re missing the beat,” Edward Jones analyst Brian Yarbrough said.

A NY Fashion Week Push

Next month, however, Coach hopes to reinvigorate its fashion credentials during New York Fashion Week.

“We’re particularly excited to announce that next month we will participate in our first New York Fashion Week, unveiling the inaugural collection from creative director Stuart Vevers, whose designs will be available in-store this fall,  We view this as an important milestone in our brand transformation, driving fashion credibility and relevance,” Luis said.

Luis also said the new Borough bag was successful “a prelude to a comprehensive re-platforming of our women’s product assortment across bags, accessories and lifestyle categories coming this fall. We also introduced a new, dual gender lifestyle store concept in two key locations, which will serve to inform our continuing evolution of global store environments. And, in marketing, we expanded our initiatives, leveraging key style influencers in our ongoing campaign.”

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Jeff Prine

Jeff Prine, Editor at Large, Accessories Magazine
Jeff returns as a regular contributor to Accessories magazine. Initially Jeff worked as senior editor at Accessories more than 20 years ago and his love of the industry has followed him until present. Since his tenure here, Jeff has continued to report jewelry, watch and other luxury goods trends as executive editor at Modern Jeweler magazine, fashion director at Lustre, and as contributor on products and trends for consumer and trade publications and websites. In addition to his editorial experience, Jeff also served as an adjunct instructor for accessories merchandising at Fashion Institute of Technology.