Strong Sales Boost Coach Net 31%

Consistently bringing to market fashionable handbags and accessories drove Coach Inc.'s fourth-quarter sales up 23 percent and pushed profits up nearly 31 percent.

NEW YORK — Consistently bringing to market fashionable handbags and accessories drove Coach Inc.’s fourth-quarter sales up 23 percent and pushed profits up nearly 31 percent.

The strong performance bolstered results for the year-end period, and led the company to update its earnings guidance for fiscal 2007. Lew Frankfort, chairman and chief executive officer, said in a conference call to Wall Street that results “continue to be driven by the monthly flow of fresh and relevant products which have positively impacted all key selling metrics.”

For the three months ended July 1, the company said net income rose to $117.6 million, or 31 cents a diluted share, from $89.9 million, or 23 cents, in the same year-ago quarter. The consensus among several Wall Street analysts was 29 cents. Sales rose to $514.4 million from $418.7 million.

For the year, net income jumped 37.8 percent to $494.3 million, or $1.27 a diluted share, from $358.6 million, or 92 cents, in the prior year. Sales gained 23.4 percent to $2.11 billion from $1.71 billion.

Shares of Coach closed Tuesday up 2.8 percent to $29.50 on heavy volume.

Frankfort said the company was pleased with the continued momentum of its North American full-priced business, where the increase posted by its own stores reflected double-digit comp gains and there are also significant increases in U.S. department store point-of-sale sales, with comp sales “up over 20 percent last quarter and total sales up about 16 percent after accounting for the closure of locations as a result of the Federated-May merger.”

The chairman added, “We’re confident that fiscal year 2007 will be another excellent year for Coach with sales rising to at least $2.5 billion, or at least 19 percent ahead of last year.”

The company said operating income is expected to rise over 20 percent, with an operating margin of nearly 37 percent. Earnings per share was forecasted to rise to at least $1.55, up 22 percent from a year ago and ahead of analysts’ consensus estimate of $1.53 for the year.

In the direct-to-consumer channel, fourth-quarter sales rose 23 percent to $419 million. U.S. same-store sales rose 18.5 percent, with retail stores up 10.9 percent and factory store sales up 29 percent. In Japan, sales rose 20 percent on a constant-currency basis, while dollar sales rose 12 percent because of a weaker yen. Indirect sales, those at department and specialty stores, increased 23 percent to $96 million in the fourth quarter.

This story first appeared in the August 2, 2006 issue of WWD.  Subscribe Today.

James Hurley, luxury goods sector analyst at Telsey Advisory Group, said he expects Coach to continue delivering strong results. He said Coach is well positioned in the market, both domestically and internationally. “The company has product for the 13-year-old to the 55-year-old, with a wide range of price points,” he added.

Hurley said the key to Coach’s success is its value proposition, where consumers feel they get a “lot of bang for the buck at a price point that is still well below its European counterparts.” The analyst believes Coach is better able to provide style and functionality in each product, through zippers and multifunction pockets to clips for accessories or keys, which add to the value proposition.

“The new product lines at Coach are evolutionary, not revolutionary. Unlike other fashion firms, Coach is much more scientific in testing [new product]. For Coach it is somewhere between art and science,” Hurley said.

Frankfort said during fiscal year 2007 the company will introduce two major lifestyle platforms. The first, Signature Stripe collection, was launched last month and continues to exceed company expectations. The collection represents 14 percent of sales in retail stores in the U.S. and Japan. The totes in the collection are reversible and can be monogrammed. The second is a new Legacy collection set to launch in late September. The ceo said the company will relaunch Ergo in the spring, with “soft styles and sophisticated appeal.”