Coach’s Green Spring: Profits Shoot Up 53% in First Quarter

Coach posted double-digit gains for the third quarter and nine months, but there are signs that sales are shifting to off-price from full-price stores.

NEW YORK — Coach remains at the top of its game.

The handbag and accessories firm brand on Tuesday posted a 53 percent gain in net income to $89.2 million for the third quarter ended April 2 and a 48.5 percent leap in income for the nine-month period, to $291.1 million. But sales growth at full-price stores decelerated for the fourth quarter in a row while growing substantially at off-price units.

In discussing the results, Lew Frankfort, chairman and chief executive officer, said during a conference call to investors and analysts that he expects to significantly increase the number of Coach stores in Japan to at least 140, where he plans to mirror the brand’s U.S. multichannel distribution model.

Coach said it was acquiring Sumitomo’s 50 percent interest in Coach Japan for $225 million, plus undistributed profits and paid-in capital of $75 million. The deal is expected to close at the end of the current fiscal year, as well as be accretive to earnings in fiscal year 2006.

Frankfort said the number of flagships in Japan could reach 15, more than double the current level. But there’s also room for much more. Frankfort told analysts, “We expect that we could eventually have a total of at least 140 Coach locations in Japan across the same multichannel distribution model that we have established in the U.S.” That model covers Coach’s own full-price and off-price stores as well as department store distribution.

Frankfort told Wall Street that as Coach approaches its five-year anniversary as a public company, “it is important to note that we’ve achieved double-digit sales and earnings growth in every period. This consistency speaks to the sustainability of Coach’s business model, our ability to effectively execute our strategies and, most importantly, the strength and endurance of the Coach brand, which rests on three core brand equities — product innovation, relevance and exceptional value.”

Shares of Coach closed Tuesday up 5.5 percent to $27.76. The stock’s 52-week high is $29.98, the low, $17.99. Shares of the company are up over 1,000 percent since hitting the market in fall 2000. The stock has gone through three splits since going public, and is about flat since the beginning of this year.

This story first appeared in the April 27, 2005 issue of WWD.  Subscribe Today.

For the three months, net income rose to 23 cents a diluted share from 15 cents, or $58.3 million, in the prior year. The company beat revised Wall Street estimates by one cent. Earnings-per-share numbers have been adjusted for a 2-for-1 split on the stock set earlier his month. Sales for the quarter rose 32.9 percent to $415.9 million from $313.1 million.

Direct-to-consumer sales in the quarter, primarily sales at U.S. Coach stores, rose 30 percent to $209 million from $160 million, while same-store sales rose 19.3 percent. Retail sales were up 12.9 percent, while factory store sales gained 28.5 percent. Indirect sales jumped 36 percent to $207 million from $153 million in the same period last year. The company said all indirect businesses — Coach Japan, U.S. department stores, international wholesale and special markets — contributed to the increase. Sales at Coach Japan gained 35 percent in constant currency terms, driven by store openings and expansions.

On the conference call, Frankfort said strong U.S. retail comps reflect market share gains and category growth, driven primarily by well-received monthly new product flow and a higher average transaction size.

“In factory stores, we continue to experience exceptional comp store sales increases driven mainly by a substantially improved merchandise offering, with an increased level of factory exclusives tailored to the more classic factory consumer,” the ceo said.

Todd Slater, analyst at Lazard Frères & Co., said in a research report Tuesday that Coach’s 23 cents EPS, one cent above his estimate, reflected a period with “half the upside coming from revenue growth and the other half from higher interest income.”

The analyst noted that the comparable-store sales mix was weighted to the outlet store component of Coach’s business while full-price stores “decelerated sequentially for the fourth quarter in a row.”

Coach said there’s little crossover between the full-price and factory consumer. And according to Slater, the product at the two retail channels are differentiated. The outlet stores get full-price product the following year.

“However, we believe the increasing strength in the off-price channel relative to the full-price channel is worth following closely, as the consumer preference for value may begin to erode full-price sales and cut into record-setting merchandise margins,” Slater wrote in his report.

Coach is targeting sales growth of more than 23 percent to at least $415 million for the fourth quarter ending July 2, with a U.S. comps sales gain of at least 10 percent in each channel.

For the nine months, income rose to 75 cents a diluted share, from 51 cents, or $196.1 million, for the same year-ago period. Sales rose 31.4 percent to $1.29 billion from $983 million.