Coach Q3 Profit Falls as North American Sales Slide Again

In What's New, Industry News by Jeff Prine

coachNew York—Shares of Coach slid in trading today after the leathergoods brand reported a 20% drop in its third quarter income—and a 21% fall in its North American comp sales.

For the quarter ended March 29, Coach posted net income of $190.7 million, or 68 cents a share, compared with $238.9 million, or 84 cents a share, a year earlier. That still managed to beat analysts’ average estimate for 63 cents a share.

Net revenue declined 7% to $1.1 billion from $1.19 billion a year ago, missing analysts’ view of $1.13 billion.

What seemed to worry Wall Street, however, the fourth consecutive quarter of sales declines in North America. This time sales were down 18% to $648 million with comparable store sales decrease of 21% in its direct division. That was a steeper fall than analysts projected and worse than the 14% drop during the holiday quarter. And a warning from Coach that sales in its current quarter might also be down sent the stock to a nine-month low.

Sales in Current Quarter to Fall Too?

Faced with increased competition and reduced market share from rivals such as Michael Kors and Kate Spade, Coach has been working to polish its image, such as its first-ever New York Fashion Week presentation in February and touting the inaugural collection by its new executive creative director Stuart Vevers.

“During the third quarter, total sales declined as weakness in our North American women’s bag and accessories business continued to offset strong growth in men’s, footwear, and robust sales gains in Asian markets and Europe,” said CEO Victor Luis. “Our business in North America remained challenging in the period, exacerbated by the weather and shift of the Easter holiday. We experienced sharply lower traffic levels in our stores while our Internet results were impacted by our strategic decisions to eliminate third party events, as well as limit the access and invitations to our factory flash site.”

Luis pointed out, however, that the company’s results in China grew more than 25% “and comparable store sales rising at a double-digit rate.”

Indeed, international sales were a bright spot: rising14% to $441 million (on a constant currency basis sales grew 20%).

During the quarter, gross profit totaled $781 million compared to $880 million a year ago. Gross margin was 71.1% versus 74.1% reported in the prior year. Selling, general and administrative expenses were down to $519 million from $532 million a year ago and comprised 47.2% of net sales compared to 44.8% in the year-ago quarter.

In a conference call with analysts, Chief Financial Officer Jane Nielsen said North American comparable store sales will fall as much in the quarter through June as they did in the third quarter. She also said the company stopped buying back shares after spending $525 million so far this year, less than the $700 million it planned on spending in that timeframe, and will retain that cash to invest in the business.

Luis has been on a mission to turn Coach from merely leathergoods into a wider brand with a “full array of shoes, outerwear and other accessories.”

“We have made continued progress this quarter in our work to transform the Coach brand across all aspects of the consumer experience–product, stores and marketing,” Luis said. “We’ve also announced a partnership with Studio Sofield to further evolve our lifestyle store concept. Finally, the editorial coming out of Fashion Week provides a springboard for our marketing campaign for fall, in support of the new collection.”



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