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Profits in Those Bags: Coach Sets Growth Plan As Net Leaps 40 Percent

Coach Inc. posted a 40.5 percent jump in second-quarter earnings and raised fiscal 2005 guidance, as its board authorized a stock split.

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NEW YORK — Coach is out to maintain speed.

The American luxury brand on Tuesday reported a 40.5 percent jump in second-quarter earnings, a 46.5 percent leap in first-half profits, it raised its fiscal 2005 guidance and authorized a 2-for-1 stock split. It also outlined ways it plans to keep up its growth. They include:

This story first appeared in the January 26, 2005 issue of WWD.  Subscribe Today.

  • Continued acceleration in the opening of U.S. stores, with the goal of having 300 American units within four or five years.

  • Adding more units in Japan, including 10 this year.
  • Specific store events such as trunk shows and special programs for its most loyal customers.
  • A possible buyout of its Japanese  partner, Sumitomo, with the first increased stake coming at the end of fiscal year 2007 and again at the end of fiscal year 2010.
  • Increasing the number of higher-priced, limited-edition items to appeal to more luxury consumers.

The upscale handbag and accessories powerhouse said for the three months ended Jan. 1, earnings grew to $134.1 million, or 69 cents a share, from $95.4 million, or 50 cents, in the same year-ago quarter. Coach beat consensus estimates of Wall Street analysts polled by Thomson First Call by one penny.

On Jan. 12, Coach had raised its quarterly profit guidance to at least 67 cents from earlier estimates of at least 64 cents.

For the quarter, gross profits jumped 32 percent to $403 million from $350 million last year, while gross margin expanded by 160 basis points to 75.8 percent from 74.2 percent due to shifts in product and channel mix. Selling, general and administrative expenses as a percentage of sales declined by 33.8 percent, representing a 130 basis-point decrease from 35.1 percent in the year-ago quarter.

“Based on the vibrancy and strength of the Coach brand and the growing U.S. premium-accessories category, we’ve never felt more positive than we do today about our prospects for future organic growth,” said Lew Frankfort, Coach’s chairman and chief executive officer, during a conference call to Wall Street analysts. He added that the firm’s “diversified business model, multiple product platforms, monthly product notice and consumer-centric orientation help us mitigate risk.”

Sales in the period rose 29.2 percent to $531.8 million from $411.5 million. By channel distribution, direct-to-consumer sales — mostly at Coach stores in the U.S. — gained 30 percent to $307 million from $237 million, while same-store sales were up 16.5 percent. Coach’s U.S. full-price comps have increased at a double-digit rate in each of the last 12 consecutive quarters.

The comps gain includes a 13.9 percent jump at retail stores and a 20.7 percent increase in factory store sales. Merchandise at the factory stores included an increased level of factory exclusives geared for the more classic-focused consumer. The company said Internet sales also increased, but did not provide any specifics. Indirect sales — Coach Japan, U.S. department stores and international wholesale — rose 29 percent to $225 million from $174 million last year.

The chairman said U.S. retail comps “reflected increases in average transaction size and modest gains in traffic.” He added that the gains were driven primarily by sales of handbags.

The company guided fiscal year 2005 sales to more than $1.66 billion, a gain of at least 26 percent from a year ago, with earnings per share of at least $1.87. The current consensus EPS estimate for the fiscal year is $1.84. Sales in the second half are estimated to rise 21 percent to at least $790 million, along with an EPS projection of at least 83 cents versus a consensus of 82 cents and last year’s reported 64 cents for the period.

One strategy for continued growth is the acceleration of the opening of U.S. retail stores. Frankfort said the firm plans to add “100 U.S. retail stores over the next four or five years, bringing the retail store base to nearly 300 locations. During the second half of fiscal year 2005, we will add up to nine additional retail stores.”

As for its Japanese store base, the company will continue to open retail sites, with at least 10 slated for this year. Coach recently opened four sites, including the first Osaka and Sendai flagships.

The chairman told analysts that Coach has not seen any discernible changes in its customer base, with the possible exception of a leveling off of consumers younger than its core demographic of shoppers 18 years and older. But it does see the possibility of attracting a more luxury-oriented consumer who is looking for special-edition product.

“Overall, our holiday sales were driven by handbags and women’s accessory, in addition to stylish business totes, while wristlets and key fobs were great lower-priced items,” noted Michael Tucci, president of Retail North America at Coach, during the conference call. “Important trends were color, shine, fur trims and embellishments.”

In particular, the legacy soft duffel group, a key handbag initiative for holiday, performed exceptionally well throughout the quarter, as did the firm’s more stylish business totes, which replaced the more traditional women’s briefcases. The company also was pleased with the performance of Madison, its first evening collection, according to Tucci.

Tucci also pointed to the success of Coach’s higher-priced limited-edition pieces, including the Coyote trimmed duffel and Madison framed mink and feather bag, each at $698. “These styles blew out and speak to the ongoing opportunity to more effectively target the top tier of our customer base and to selectively trade up our average retail in handbags,” he said.

Frankfort noted that, in terms of higher price points, “we don’t know how high is up. We do know that a good part of our franchise is prepared to spend more. What’s critical for us is to have a balanced assortment so that we can still maintain an attractive price point so that we can have compelling product for the more value-oriented consumer within our franchise.”

Tucci added that, for spring, the Dot collection features merchandise totes, demis and accessories from footwear to a card case. The Hamptons collection in pebbled leather helped to round out the initial offerings for spring. Later in the season, Coach will introduce an expanded and updated Hamptons Weekend collection, which will feature Hamptons Scribble, a whimsical and colorful interpretation of the firm’s signature logo.

With Coach seemingly on a tear for so long, could there be any roadblocks ahead?

Dana Telsey, analyst at Bear, Stearns & Co. Inc., believes that Coach will continue to do well. “The Coach brand name has an aura attached to it and the growth that Coach has and its momentum is unique within the industry,” she said.

Telsey explained, “What makes Coach so special is the innovation of product and that they’re always looking to come up with new and exciting product for customers at an accessible price.”

While the thank you that is sent to customers and the online surveys the firm conducts are very recent initiatives, they both already contribute to the company’s future growth plans. “I think the fact that Coach knows so much more about its customer helps them keep that customer,” Telsey said.

Sunny Diego, Saks Fifth Avenue’s director of women’s accessories and fashion merchandising, observed: “We do think they have great product and Reed [Krakoff, president and executive creative director] has an amazing team working with the retailers. Kathy Nedorostek, who runs the wholesale [business], is an amazing woman who comes from the buy side — she was a divisional merchandise manager here at Saks.

“Their team is working to differentiate our buys, so not only are they keeping their own stores special, but [they] want to make that department store customer excited to buy Coach, as well.” Coach is not carried in the New York store.

Coach’s board authorized a 2-for-1 stock split to be distributed on April 4 for shareholders of record on March 21. Company executives said the stock split will increase market liquidity and make the stock accessible to individual investors.

For the six months, income jumped 46.5 percent to $201.8 million, or $1.03 a diluted share, from $137.8 million, or 72 cents, last year. Sales rose 30.7 percent to $875.8 million from $669.9 million.

Shares of Coach closed at $54.64, up $1.82, in trading Tuesday on the Big Board.

— With contributions from Emily Holt

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