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Coach Spies Potential Even as Economy Bites

Company expects sales to grow about 10% this fiscal year.

“No social or economic class is immune from this crisis,” said Lew Frankfort, chairman and chief executive of Coach Inc. “The consumer is fragile. She’s worried about her future. She’s worried about her security. She’s visiting malls and retail stores less frequently.”

This story first appeared in the October 22, 2008 issue of WWD.  Subscribe Today.

And Coach, the brand that helped define the term “accessible luxury,” is feeling the pinch, posting on Tuesday a 5.8 percent drop in first-quarter net income on an 11.2 percent rise in sales. It also lowered its sales forecast for the year.

But Frankfort remains upbeat, believing Coach can pick up market share against key competitors as pressures mount on even more affluent consumers. “What we’re banking on is that we can get a greater share of her wardrobe spend as well as a greater share of her gift spend,” he said.

The firm isn’t pulling back on its retail expansion or plans for its new Collections concept, nor on its earnings guidance for the full year. However, in a nod to the chaos currently running through the world of discretionary spending, Coach has reduced sales projections and, correspondingly, spending plans for this fiscal year.

Frankfort said Coach would grow by increasing product differentiation, offering a higher level of service and improving other aspects of its operations and merchandising.

Coach’s first-quarter net income fell to $145.8 million from $154.8 million a year ago. On a per-share basis, profits rose to 44 cents a diluted share from 41 cents a year ago due to fewer shares outstanding in the most recent quarter. Sales for the three months ended Sept. 27 increased to $752.5 million from $676.7 million. Direct-to-consumer sales were up 15.9 percent to $592 million, while wholesale revenues declined 3.6 percent to $160 million.

The company expects sales to grow about 10 percent this fiscal year to approximately $3.5 billion. Previous projections called for a 13 percent rise. Earnings are still slated for a roughly 10 percent increase to about $2.25 a share.

Coach reduced its expected selling, general and administrative (SG&A) expenses by $40 million this year, but plans to keep investing in the areas of design, supply chain and retail expansion.

Frankfort said the company, which has 318 full-price stores, plans to open about 40 stores a year and has identified 200 additional locations in new and existing markets in North America. The firm also plans to open 50 stores in China over the next five years.

Investors cheered the firm’s results and outlook by trading shares up 9.3 percent to $20.37 as the Dow Jones Industrial Average flirted only briefly with positive territory and closed down 2.5 percent, or 231.77 points, to 9,033.66. The Standard & Poor’s Retail Index contracted 2.4 percent to 275.79.

“Once the global financial markets stabilize, we will just be in a recession and consumers will feel it will just be a matter of time before things get better and I believe that’s going to occur over the next several weeks,” Frankfort said

“We will still be in a very tough environment, which I think will last through 2009,” he said. “Consumers are deleveraging, reducing their borrowing, and learning hard lessons and I think they’re going to be much more cautious. We’re going to be moving into a sustained period post-recession that will be more cautious. We will not go back to the exuberance that existed in 2005.”

Analysts agree the good old days are not coming back and most brands and stores are not expected to fare as well as Coach, which has been careful with its brand, has diverse distribution and is financially stable.

Consumers’ access to credit has been restricted and a smaller amount of credit is available to them, Leon Nicholas, director of retail insights at the Management Ventures Inc. consultancy, said.

“They can’t spend as much money, they simply can’t,” Nicholas said. “We’re heading into a potentially long recession. The fundamentals break down here.”

Some consumers were spending assuming their stock portfolios would rise 15 percent even if their salaries were up just 3 or 4 percent, he said.

“The fundamental assumptions that undergirded a lot of purchases that were based upon wealth are gone,” Nicholas said.

Shoppers, even those in higher income brackets, are expected to carefully pick and choose both their purchases and where they shop.

“The consumer will have a new appreciation for managing their spending,” said David Bassuk, managing director at AlixPartners. “People who have always felt no pain and no pressure now realize that can come to an end quickly. For the long term, people will manage their spending in a very different way.”

This new consumer attitude is expected to further pressure retailers, especially those that are already teetering.

“Even if we have a couple of good days in the market, I think this really hits home with people,” Bassuk said. “Everybody is recognizing that the world is changing. There will be a much greater gap between winners and losers in retail. The winners will win and the losers will really fall hard.”

Although some retail and fashion stocks joined Coach in gaining ground Tuesday, investors still seem to be shying away from the sector given the concerns about the consumer for the rest of this year and beyond.

Among the broadline stores losing ground in the markets were Dillard’s Inc., down 5.7 percent to $6.17; Macy’s Inc., 5.1 percent to $10.19; Sears Holdings Corp., 4.9 percent to $55.84; The Bon-Ton Stores Inc., 4.5 percent to $1.91, and Wal-Mart Stores Inc., 1.4 percent to $53.67. Saks Inc. managed a 6.4 percent rise to $6.17, while Kohl’s Corp., upgraded to “buy” from “hold” by Citi analyst Deborah Weinswig, was up 1.7 percent to $32.08.

Specialty stores weathering stock declines included Mothers Work Inc., down 19.4 percent to $10.39; Chico’s FAS Inc., 11.5 percent to $3.09; The Talbots Inc., 7.7 percent to $8.32; Wet Seal Inc., 6 percent to $2.65; Charming Shoppes Inc., 4.7 percent to $1.64, and Bebe Stores Inc., 3.8 percent to $6.88. Chains gaining ground in the sector included American Eagle Outfitters Inc., up 5.3 percent to $11.06; Hot Topic Inc., 3.1 percent to $6.01, and New York & Company Inc., 3.8 percent to $3.31.

On the vendor side, the decliners included Liz Claiborne Inc., down 6.7 percent to $9.32; Phillips-Van Heusen Corp., 5.8 percent to $26.42; True Religion Apparel Inc., 4.5 percent to $17.02, and Polo Ralph Lauren Corp., 2.6 percent to $47.50. Among those picking up steam were Fossil Inc., up 3.1 percent to $17.86, and Jones Apparel Group, 2.1 percent to $9.95.