Riding the Wave: Coach Bullish on Bags as Net Leaps 120%

Consumers reined in June spending, but not at Coach, which posted a 46.1 percent jump in sales and 119.9 percent leap in fourth-quarter income.

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NEW YORK — Coach delivered first-class results in the fourth quarter and expects the premium handbag sector to continue to soar.

A 46.1 percent jump in sales helped boost Coach Inc.’s fourth quarter income by 119.9 percent over last year, which beat Wall Street analysts’ best estimates.

Lew Frankfort, chairman and chief executive officer, said during a conference call to investors, “Our strong fiscal 2004 performance speaks to our philosophy of operating Coach as a small business with large sales, which we manage very actively.”

Frankfort was also bullish on the sales outlook. He said the company remains “confident in our ability to sustain our growth and deliver superior results over our planning horizon.” He pointed out that the company’s internal analysis “projects at least 20 to 25 percent growth in sales of premium handbags and women’s accessories in calendar 2004 to about $3.7 billion to $4 billion.”

For the three months ended July 3, income skyrocketed to $65.7 million, or 34 cents a diluted share, from $29.9 million, or 16 cents, in the same year-ago quarter. Analysts’ consensus estimate was 31 cents for the period. Sales for the quarter rose to $338.1 million from $231.5 million. The fourth quarter included an extra week in the calendar year, which the company said contributed $20 million to 2004 results. Excluding the extra week, sales would have risen 38 percent.

For the full year, income jumped 78.5 percent to $261.7 million, or $1.36 a diluted share, from $146.6 million, or 79 cents, last year. Sales gained 38.6 percent to $1.32 billion from $953.2 million. Excluding the extra week sales would have risen 37 percent.

While government data from the Commerce Department on Tuesday indicated that consumer spending dropped by 0.7 percent in June, after climbing by a strong 1 percent in May, Coach executives on the conference call said “consumers are embracing our $300-plus price points.”

Dana Telsey, retail analyst at Bear Stearns, said: “Coach has had an excellent 2004 and terrific start for 2005. Coach is different from other firms because of the amount of testing that they do on their products. The testing allows them to know what their customers like and what to put in their stores and get full-price selling. We believe that the future is bright for Coach and that it will have a very good holiday season.”

This story first appeared in the August 4, 2004 issue of WWD.  Subscribe Today.

Frankfort explained that because the Coach consumer now purchases an average of 3.5 handbags a year, up from 3.1 in 2002 and 2.4 in 2000, there exists a higher and “sustainable level of category spending.”

Coach’s results back this up. For the quarter, Frankfort said sales in the direct-to-consumer channel — mostly sales at U.S. Coach stores — were up 39 percent to $195 million in the quarter, from $140 million, with same-store sales up 17.7 percent. Retail sales were up 20.1 percent, while factory store sales rose 14.5 percent. Indirect sales, such as those at Coach Japan and in international wholesale, rose 57 percent to $144 million.

The ceo highlighted the new styles and trims in Coach’s popular straw basket totes, which were a Mother’s Day feature as a strong seller. Also selling well was the pastel Optic Signature group, introduced in April, which Frankfort said “sold through briskly.” After Mother’s Day, the company changed its front table in its stores to highlight the introduction of the Beach group, which featured two new styles: the Beach bucket bag in two sizes and the Soho small hobo and clutch shapes. Then in June the company introduced a series of Signature Patchwork and Signature Stripe styles that sold well.

All those monthly changes contributed to a healthy traffic flow in the stores and continued momentum for the U.S. full-priced business. “Results continued to be driven by the monthly flow of fresh and relevant products, notably handbags and women’s small leather goods. Also, our U.S. factory store business surged due to substantially higher mall traffic and the strength of the Coach brand, despite a markedly reduced level of promotions,” explained Frankfort.

In September, Coach is rolling out an update of its Hamptons collection, with new silhouettes and design details combined with a “fresh array of key fall colors.” Wristlets and suede hats will complement the collection. Also in September, Coach will add a new bronze metallic group within its Vintage Signature collection, a feature of its planned fall campaign.

For holiday, the company will broaden its evening collection, which includes scarves, gloves, shoes and outerwear, all featuring rich satins and pavé rhinestone buckets. Among other highlights, the company will introduce resort products to its stores in early December, which Coach estimates will enable it to reach nearly 10 percent of the month’s sales.

For Coach, the focus isn’t just on product for growth. In fiscal year 2005, the company will increase the number of department store shop-in-shops to 200 from 120. And the new case line fixtures will be expanded by about 450 to nearly 600 doors this year. With consumers clamoring for the brand, Coach will also add to its store base with 100 new U.S. sites over the next four to five years. Planned store openings would bring the retail store base to 275. So far 20 new retail stores are set to open in fiscal 2005.

“The customer response to Coach has been exceptional. In the last year we have expanded our offerings with the [Coach] shop-in-shop right off the main entrance, prime Lord & Taylor real estate. The response for the last couple of seasons has been phenomenal. There seems to be a hunger on the part of the customer for their product,” said LaVelle Olexa, senior vice president fashion merchandising Lord & Taylor

Mike Devine, Coach’s senior vice president and chief financial officer, said during the call that the company strengthened its cash and marketable securities position by $119 million to $564 million due to the “free cash flow, driven by significantly higher net income and option exercises. The balance sheet was essentially debt-free at year-end, as Coach Japan paid down their line of credit by nearly $25 million during the fiscal year.”

Coach Japan is a joint venture with Sumitomo, and executives on the call didn’t rule out the possibility of Coach buying back Coach Japan in 2007, when the opportunity is comes up. Meanwhile, the company will open 10 new Japanese locations during fiscal 2005.

Shares of Coach on Tuesday fell $2.79, or 6.48 percent, to close at $40.25 in trading on the Big Board.

Neely Tamminga of Piper Jaffray explained that the decline was due to concerns over the Japanese consumer and whether she will continue to buy Coach products. “The mid-single-digit comp increase decelerated from prior quarters, but the company also said that with tourism up, many of the purchases by Japanese consumers were not made in the core Japanese stores but in retail stores outside of Japan, such as in Hawaii. This is a market that will not forgive any sniff of deceleration, but I like the Coach business, which is one that is anomalous in the category.”

Devine also noted the company’s goals for the new year: “For the first quarter, we are targeting net sales of at least $330 million, representing a year-on-year increase of at least 27 percent, with U.S. comparable-store sales gains of at least in the low teens, driven by full-price retail stores.”

In addition, the full-year estimates include a sales gain of at least 20 percent to $1.6 billion, with 10 percent seen in same-store sales growth in the U.S. and a total sales increase in Japan of at least 28 percent in constant currency, which would equal to sales of at least $355 million. EPS is expected to grow 23 percent to $1.68 versus Wall Street’s consensus estimate of $1.64.

— With contributions from Emily Holt

By the Numbers
Coach Inc.
Most-Recent Qtr.
Prior-Year Qtr.
% Change
Net Income
Full Fiscal Year
% Change
Net Income
Source: Company reports
For the period ended July 3, 2004
Figures are in millions, except for per share data. Net income and per share
figures are exclusive of special items.
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