Coach Q4 Results Up, But U.S. Sales Disappoint

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Duffel from Coach’s successful Legacy Collection

New York—Despite a 24% increase in its fourth quarter profit, Coach today saw its shares drop in price upon market worries about a “deceleration” of sales in North America.

For the quarter ended June 30, Coach posted a profit of $251.4 million, or 86 cents a share, up from $202.5 million, or 68 cents, a year ago, helped by an improved gross margin at 72.6% from 71.8%.

Total sales increased 12% to $1.16 billion with sales in China, where Coach has been expanding, jumping 60%.

The results were ahead of analysts’ average estimate for earnings of 85 cents on sales of $1.12 billion.

Nevertheless, weaker-than-expected performance in North America evidently disappointed investors.

“During the fourth quarter our international sales remained robust, driven by both distribution and productivity increases,” Lew Frankfort, chairman, said. “In North America, however, an increasingly promotional environment led to lower growth than expected in factory stores. As a result, we responded by reinstating our prior practice of in-store couponing in a cross section of factory locations late in the period.”

Department Stores Sales Declined

In its direct-to-consumer division, sales increased 13% to $1.05 billion and North American comparable store sales for the quarter rose 1.7% below analysts’ estimates for a 6.7% increase.

China results continued to be exceptional with overall sales growth of 60% and comparable store sales rising at a double-digit rate. Sales at Coach Japan increased 16%.

Indirect sales were flat at $108 million as international wholesale shipments increased, while shipments into U.S. department stores declined. And while point of sale saw growth internationally, “U.S. department store sales decreased moderately on a year-over-year basis in the quarter.”

Despite being “mindful of balancing the impact of the muted consumer environment in North America and a softening global macroeconomic outlook” Frankfort said the company is optimistic about its success next year with the new Legacy collection, men’s and international growth opportunities.

Additionally, 2013 “will be an investment year, as we amplify our actions to drive long-term growth,” Frankfort added.

But Coach’s sales deceleration “triggers the following thoughts,” said Brian Sozzi, retail analyst at Decoding Wall St., “Middle-income purchase intent for handbags and accessories overall has waned along with consumer confidence, tourist spending at key Coach stores has been hit like it has been hit at Macy’s, Tiffany & Co., and Saks and the threat of a fast growing competitor in Michael Kors is no longer just a threat, it’s becoming apparent in performance.”

Added Randal Konick, analyst at Jefferies: “The factory channel, which has higher margins, in particular is experiencing difficulties due to an increased promotional environment, and we view management’s reinstating of the in-store coupon strategy as a negative development.”

Noting increased competition from Michael Kors, Tory Burch and kate spade new york, Jennifer Davis, an analyst at Lazard Capital Markets, told Bloomberg: “People are disappointed with the North American comparable sales. The slowdown exacerbates concern that Coach might be losing market share in the U.S.”