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Coupons helped Coach Inc. get its mojo back in the first quarter — and Wall Street rode along.
This story first appeared in the October 24, 2012 issue of WWD. Subscribe Today.
Shares of the handbag and accessories maker were up 7.4 percent to $58.15 Tuesday after the company said a return to coupons in its U.S. outlet business and a strengthening in China helped it narrowly beat Wall Street’s quarterly earnings estimate. The stock stood out on a bad day in the market, where quarterly results from other companies and economic worries pushed the Dow Jones Industrial Average down 1.8 percent, or 243.28 points, to 13,102.61.
Coach’s momentum was a welcome change after last quarter’s tepid financial results, which were the result of a “softened” U.S. economic scene, according to Coach chairman and chief executive officer Lew Frankfort.
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Although the backdrop has remained unchanged, Frankfort told WWD that the company offset that economic fragility by reinstating the brand’s couponing program in its factory outlet stores.
“We stopped in-store couponing at the end of January to the end of June, and we were able to offset four of the five months of that decline [in revenue] through flash sales with dedicated consumers,” he explained. “We found we needed to revert to our prior practice.”
Continued economic volatility and a promotional environment drove that decision, the ceo said, adding consumers are still opting for accessories purchases over ready-to-wear.
Coupons are only available at Coach’s outlets. The brand does not run promotions in its full-priced stores.
“We have trained our consumers who want to buy discount to go to our factory stores,” Frankfort said.
That may be so, but the brand has struggled to get consumers to consistently spend more than $300 on a handbag on average.
Prior to the 2008 economic downturn, the bulk of Coach bags were priced at more than $300. After experiencing price resistance from consumers during the recession, Coach decided to broaden its mix, offering about half of its bags for less than $300. With the introduction of the higher-priced Legacy collection in August, Coach has attempted to get customers back to pre-2008 spending levels — with mixed success. The average bag purchased today still remains just under $300, Frankfort said.
But Coach has other growth levers to pull. Perhaps one of its biggest opportunities is in China, where the New York-based brand has roughly 100 stores. Coach said it expects to open 30 doors, bringing the fleet to 125 locations by yearend. The company also looks to its growing men’s division and its developing global e-commerce business as opportunities. An e-commerce site for China is slated to launch next month.
For the first quarter ended Sept. 29, Coach reported a 3 percent increase in net income to $221.4 million, or 77 cents a diluted share, compared with year-ago income of $215 million, or 73 cents a share. Earnings per share came in 1 cent ahead of the 76 cents analysts expected on average.
Net sales expanded 10.6 percent to $1.16 billion from $1.05 billion, a year earlier.
During the quarter, Coach said sales in North America edged up 8 percent, as comparable-store sales increased 5.5 percent. In China, sales rose nearly 40 percent, while comps advanced at a double-digit rate. Frankfort credited his brand’s growth in the region to its “accessible luxury” prices, which are “50 to 60 percent lower than European luxury brands.” Coach’s expansion there comes as other brands struggle, with Burberry and Mulberry both recently seeing their shares fall sharply after they revealed softness in that market. Other companies also are seeing sales growth slow in China as worries grow over the robustness of the luxury market there.
Selling, general and administrative expenses increased 16 percent to $513.5 million, due to Coach’s completion of the acquisition of its distributors in South Korea and Malaysia.
Gross margins remained flat at 72.8 percent of sales.
Eric Beder, an analyst at Brean Capital, called Coach’s results “impressive,” but said he was still “wary” of the brand’s long-term growth potential with competitors such as Michael Kors Holdings Ltd. gaining traction in the U.S. market.
Jason Asaeda, an equity analyst at S&P Capital IQ, said Coach appeared to be regaining sales momentum in North America, with the Legacy collection, the men’s business and the factory outlets all contributing.
“We think this bodes well for holiday sales,” Asaeda said. “We also see no signs of a slowdown in China.”