Coach Posts Q4 Income Rise, but Margins Falter

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Gwyneth Paltrow, the face for Coach in its Fall ad campaign

New York–Coach Inc. posted today a 3.6% increase in its fourth quarter earnings on the back of continued sales growth as more of its North American consumer purchased its handbags and other products.

For the quarter ended July 2, Coach earned $202.5 million, or 68 cents a share, up from $195.5 million, or 64 cents a share, a year earlier.

Sales rose 8.5% to $1.03 billion, beating analysts’ average estimates that expected fourth quarter income of 65 cents a share on sales of $1.01 billion.

The 2011 fourth quarter included 13 weeks, compared with 14 weeks in 2010 which hurt comparisons.

However Stock Falters On Margin Loss

Comparable store stores in North America store sales rose 10.1%, excluding the extra week in 2010.

While some analysts are concerned about consumer confidence falling in the months ahead, Lew Frankfort, Coach’s ceo, told analysts today that one-third of Coach’s customers polled “still believe that the U.S. economy is improving.”

Coach said sales in China continued to be exceptional with same store sales rising at a double-digit rate, helping to offset higher production costs and a slowdown in Japan sales following the March 11 earthquake and the tsunami.

Online is another growth area for Coach, Frankfort said. Initially its online presence was viewed more as a marketing vehicle, but Frankfort said sales are accelerating “at a significant double-digit pace” during the fourth quarter. We expect that Internet sales will grow rapidly in the years ahead while also driving consumers into the stores.”

Despite the positive news, shares of Coach fell in trading this afternoon as analysts’ scrutinized Coach’s operation margin, which fell to 30.3% from 31.2% a year earlier.

Coach’s margins may have been hurt by rising costs been hurt by higher costs, prompting the company to look for lower-coast alternatives such as Vietnam and India, according to published reports.

“The stock is priced for perfection, and unfortunately a level of excellence was not inherent in the report if we put the pieces to the puzzle together correctly,” Brian Sozzi, analyst at Wall Street Strategies, said today. “Numbers were good, but good in this trading environment and with a stock priced for earnings sizzle will likely be sold by the market. We will be paying careful attention to the comp composition (transaction value versus traffic) and the cause of the gross margin drop. But, at the moment, we feel the market’s initial response is appropriate.”

Frankfort, however, told analysts: “We don’t expect to see any additional pressure on margins in fiscal year 2012.”

Expansion in Asia

Preliminary fiscal 2011 figures show Coach’s net sales rose 18% to $4.16 billion and net income increased 24% to $881 million compared with fiscal 2010.

For fiscal year 2012, Coach said it was confident it could increase sales and earnings per share by double digits on a percentage basis.

During the quarter, Coach opened three opened three North American retail stores and closed two others, while opening nine factory stores, including six dedicated Men’s stores, bringing its total to 345 retail stores and 143 factory stores in North America. In Japan, Coach opened a shop-in-shop location and a men’s factory location in Japan where it now has 176 locations. And an additional 11 new locations opened in China during the fourth quarter, bringing the total Coach China locations to 66.

The company also plans a transition in Singapore to a direct business, with Malaysia following later in the year. Coach also recently signed distribution deals for Brazil and Vietnam, with the first openings planned for later this year.”

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