Coach 2Q Net Up 30.6%, Raises Guidance for 2007

Coach Inc., which easily beat Wall Street's second-quarter expectations, raised its full-year 2007 guidance Tuesday, and indicated that with a $7 billion playground, the company has plenty of opportunities to grow.

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NEW YORK — Coach Inc., which easily beat Wall Street’s second-quarter expectations, raised its full-year 2007 guidance Tuesday, and indicated that with a $7 billion playground, the company has plenty of opportunities to grow.

“We have a great franchise, a loyal consumer base and we’ve developed a business model that allows us to introduce fresh product every month to coincide with the visits from our best customers,” Lew Frankfort, chairman and chief executive officer, said in a telephone interview.

The accessible luxury handbag firm’s net income for the three months ended Dec. 30 jumped 30.6 percent, to $227.5 million, or 61 cents a diluted share, from $174.2 million, or 45 cents, a year ago. Wall Street had the company pegged to earn 58 cents a share. Sales rose 28.6 percent, to $836.4 million from $650.3 million. Direct to consumer sales rose 34 percent, to $675 million from $504 million. U.S. same-store sales rose 25.7 percent; retail stores gained 20.8 percent and factory store sales surged 33.4 percent.

Sales in Japan rose 17 percent, and online sales increased 46 percent. Indirect sales were up 10 percent, to $161 million from $146 million, driven by gains in U.S. wholesale shipments. The period was the 19th consecutive quarter of double-digit comps in retail stores.

For the nine months, net income rose 31.9 percent, to $353.1 million, or 94 cents a diluted share, from $267.8 million, or 69 cents, a year ago, as sales gained 26.5 percent, to $1.39 billion from $1.1 billion.

Frankfort said the company conducts extensive research of its customers, which gives it insight into what products would work. Frankfort said when the company opened new retail stores, sales at those stores were well ahead of expectations. One-third of Coach’s new customers spend at Coach’s average handbag prices, one-third are trading down and one-third are trading up.

Given the largely untapped small leather goods and accessories market, Frankfort said on a conference call to Wall Street analysts, “our opportunities, notably in our whole market, are boundless. We expect double-digit category growth in handbags and accessories to continue unabated in North America….We have been significantly understating our addressable market, which we now estimate to be over $7 billion, giving us even more room to grow.”

This story first appeared in the January 24, 2007 issue of WWD.  Subscribe Today.

James Hurley, luxury analyst at Telsey Advisory Group, said, “What they demonstrated was phenomenal growth in North America, with acceleration in business trends at retail and wholesale. They pointed to a slowing in Japan, but the brand positioning is so strong that Coach is still gaining market share there and is growing its customer base. The company has strength across all channels and is firing on all cylinders. It is a company that is extremely well-managed all year.”

With the huge demand for its recent jewelry launch and upcoming fragrance rollout in March, Coach is evolving into a “true lifestyle brand, [one] that inspires loyalty and helps attract new customers,” Hurley said. “They listen to their customer, and can excite and delight at all price points, whether its $700 or $50.”

Jewelry is expected to represent 3 percent of sales and fragrance is expected to make up about 2 percent of sales.

For fiscal year 2007, Coach increased earnings guidance to $1.71 a diluted share, a 34 percent gain from a year ago and ahead of analysts’ consensus of $1.67. Coach is projecting sales of $2.63 billion for the year, or a 25 percent gain from a year earlier.

Frankfort said on the conference call that the company’s strategy to sustain growth within its global framework includes building market share in North America with new styles and complementary categories such as jewelry and fragrance, and also growing North American retail with the opening of 40 U.S. stores in each of the next three years, to bring the store base to around 400.

The firm aims to expand market share in Japan while building brand awareness in emerging markets and improving the rate of profitability. Among new areas for growth are China and Korea.

“Our goods in China are 30 percent higher than here because of duties and other charges. There’s a strong willingness that’s growing in China for affluent Chinese to purchase luxury goods. Even at prices 30 percent higher than here, that’s still dramatically below the price points of the Euro­pean brands,” Frankfort said during the interview.

Frankfort foresees the customer in China who buys two non-branded bags a year becoming a customer who still buys two bags, but one of them is a desirable brand such as Coach. Many consumers will buy a wallet or wristlet as a first Coach product, he said.

During the quarter, the company opened three Coach sites and intends to open at least 10 more in major cities on the Chinese mainland over the next two years to bring the store count there to 15. The company works closely with the Chinese government to crack down on counterfeiting, and has a similar program in Korea.

“Over the last several years, there’s been a dramatic change in attitude. Today, the Chinese [government] is protective of a company’s international trademarks. They are proactive in helping companies protect [the marks] through confiscation of counterfeit merchandise and even the closing of factories. That was not the case five years ago,” Frankfort said.

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