Coach Earnings Soar 37.2%

Coach Inc. continued to roll, reporting impressive second-quarter results that included double-digit gains in income and sales.

NEW YORK — Coach Inc. continues to roll, beginning 2006 with a new spring Poppy collection and ending its second quarter with eye-popping results that included double-digit gains in both income and sales.

“Our distinctive business model is based upon the underlying principle that Coach offers accessible, luxury American lifestyle accessories to a loyal and growing consumer base,” said Lew Frankfort, chairman and chief executive officer, during a conference call to Wall Street. “We provide consumers with fresh, relevant and innovative products that are extremely well made at an excellent price. By doing so Coach is able to continually strengthen our leadership position by building lasting market share.”

For the three months ended Dec. 31, net income jumped 37.2 percent to $174.2 million, or 45 cents a diluted share, from $126.9 million, or 32 cents, in the same year-ago quarter. Sales rose 22.3 percent to $650.3 million from $531.8 million. Direct-to-consumer sales, which now include Coach Japan, rose 21 percent to $504 million from $416 million. Same-store sales gained 19.9 percent, with retail stores comping up 12.8 percent and factory stores gaining 30.2 percent. Sales in the quarter in Japan rose 20 percent on a constant currency basis. Indirect sales, which now exclude Coach Japan, rose 26 percent to $146 million from $116 million a year ago.

In the first half, net income skyrocketed 42.5 percent to $267.8 million, or 69 cents, from $187.9 million, or 48 cents, a year ago. Sales rose 25.5 percent to $1.1 billion from $875.8 million.

Investors applauded the results by sending shares of Coach up $2.82, or 8.8 percent, to close Tuesday at $34.89.

Michael Tucci, president of Coach’s retail division, North America, said during the call that overall sales during holiday were “driven by handbags and women’s accessories while letter charms, iPod covers and cell phone lanyards were great giftables at sharp price points.”

Craig Johnson, president of retail consulting firm Customer Growth Partners, observed, “A shopper will get the bag she wants, but Coach then gets the [margin] benefit from the second and third sales that come from the iPod cases, key cases and wristlets. Those add-ons have huge margins. And Coach does well in the gift segment, both the consumer gifting herself as well as her friends.”

This story first appeared in the January 25, 2006 issue of WWD.  Subscribe Today.

Neely Tamminga, analyst at Piper Jaffray, said in a research note that the multipriced strategy allows the company to “continue to attract incremental, new shoppers to the brand and then allows its loyal customers to ‘trade up’ to a higher-priced limited-edition bag as their taste matures.”

Analyst Robert Drbul of Lehman Brothers wrote in a research note, “Over the past five years, Coach has posted double-digit sales and earnings growth in every quarter, and we expect the company to continue to do so. We believe this consistency is illustrative of Coach’s sustainability and believe the company’s strong pipeline of new and innovative product will sustain its current momentum.”

Frankfort told Wall Street that the company has implemented four key strategies that focus on achieving sustainable growth. These include building market share in the growing North American women’s accessory market, which includes new usage occasions such as weekend, evening and baby. Growth in U.S. retail is also part of the plan. The company is looking to add 100 U.S. retail stores over the next four years to bring the store base to at least 300. Coach also plans on growing market share with the Japanese consumer. And finally, there will be continued focus on improving profitability rate so earnings will continue to outpace revenues.

Regarding products, Poppy is the lead collection of fun bags that hit sales floors in January, and shop-in-shops in December, with sales “already off to a great start,” the company said.