Strong North American Sales Boost Coach’s Q2 Profit

In Industry News, What's New by Accessories Staff1 Comment

Actress Gwyneth Paltrow appears again in Coach's spring ad campaign

New York—Strong sales across North America helped bump up Coach’s second quarter profit by 15%, ahead of expectations.

For the quarter ended Dec. 31, the handbag and accessories company said net income rose to $347.5 million, or $1.18 a share, from $303.4 million, or $1 a share in late 2010.

That was better than the $1.15 a share average estimate of analysts.

Revenue also rose 15% to $1.45 billion from $1.26 billion. Comparable store sales in its North American store sales rose 8.8%. Gross margin slipped to 72.2% from 72.4%, but less than expected.

Coach’s report beat analysts’ average estimate for earnings of $1.15 a share on sales of $1.43 billion.

“We were especially pleased with our ongoing strength in North America during the holiday season, as total revenues rose 15%, Lew Frankfort, chairman said. “This growth indicates that we are continuing to increase our share of an expanding U.S. accessories market. In our direct-to-consumer businesses, all channels benefited from our innovative digital media strategy, spanning our own websites, mobile platform and social media, which enabled customers to purchase wherever they preferred to engage with our brand.”

Direct-to-consumer sales, which now include its Singapore division, increased 17%. While its North America stores posted increases, comparable store sales in Japan were flat. China, which Coach cited as its largest growth opportunity, saw double-digit comparable store sales growth.

China to Generate $300 Million in Sales

Indirect sales were flat at $166 million, hurt by the timing of international shipments. International sales at other retailers were strong for the quarter while sales in U.S. department stores were even with last year’s holiday, Coach added.

During the second quarter, Coach opened five retail stores and five factory outlet stores bringing its total direct stores to 350 retail and 157 factory outlets. In Japan, Coach opened six locations taking the total to 184 at the end of the quarter. In China, nine new locations were opened during the quarter including a flagship in Hong Kong on Nathan Road and eight locations on the mainland, bringing the total to 80.

“Internationally, our directly-operated businesses are also growing nicely, as China continues to post excellent gains and remains on track to generate at least $300 million in sales this year.” Frankfort said. “Just after the quarter, and consistent with our strategy of directly operating select Asian markets, we took control of our domestic retail business in Taiwan. As previously discussed, we will be acquiring our Malaysian retail business in July.”

The strong growth both in North America and China is a reassuring sign to analysts who have been concerned about a slowdown in luxurygoods due to concerns about Euozone debt and even a slowdown in emerging nation’s economies.

“The rise in sales was a positive indication for the luxury-goods market, battered by the recent economic upheaval,” wrote analysts at Zacks Equity Research. “Coach’s sustained focus on store sales productivity, merchandising, and marketing and strategic pricing have helped it remain afloat in a difficult consumer environment as well as drive comparable-store sales growth.”

Although Coach had reduced prices during the height of the recession, Frankfort told analysts in a conference call today that the average retail price on its handbags is moving upward although it was basically flat during holiday. Sales of handbags above $400 were cited “as a growth opportunity.”

Commenting on its online-only flash sales on its outlet sites, Mike Tucci, president of Coach North America called them “a highly profitable initiative.”

The company also announced that during the second fiscal quarter, it repurchased and retired nearly 4.8 million shares of its common stock at an average cost of $62.48, spending a total of $300 million. At the end of the period, approximately $600 million remained under the company’s current repurchase authorization.


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