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Shares of Coach Inc. fell 6.5 percent in trading Tuesday to close at $61.03 after the company said during its fourth-quarter conference call that gross margin for the current fiscal year would be “essentially flat” compared with the year just ended.
This story first appeared in the August 3, 2011 issue of WWD. Subscribe Today.
Lew Frankfort, chairman and chief executive officer, told WWD, “I feel very positive that we can maintain high margins in the 72 percent to 73 percent [range]. We’re pleased to be able to maintain our margins in that range in the face of increasing costs.”
He said some hardware costs have risen, while fabric costs have gone down. That was offset in part by slightly higher leather costs. One issue that remains is higher labor costs, the ceo said.
Chief financial officer Michael F. Devine told analysts during the conference call to Wall Street that the firm is “guardedly optimistic about gross margin.” The company said gross margin for the year ended July 2 was 72.7 percent. Consequently, a 72 percent to 73 percent gross margin range, while still high, would be flat compared with fiscal year 2011.
Devine said the most worrisome of sourcing pressures is wage inflation in China. He noted that Coach is beginning a “very aggressive program to move 50 percent of our units produced out of China.”
Despite the cost pressures, Frankfort said in the interview the firm’s “luxury business is still very strong and the strength in the last quarter continued through July.”
The company’s business in Europe is still relatively small, so there’s little impact from any curtailing of spending due to the sovereign debt crisis in the so-called PIGS countries — Portugal, Italy, Greece and Spain.
As for the firm’s new distribution agreement for the Brazilian marketplace, Frankfort said the country has a “rapidly growing luxury goods market and a burgeoning middle class. We have a lot of Brazilian tourists [who buy Coach product] in Mexico and the U.S., which bodes well for our entry.” Despite Brazil’s steep import duties, the ceo said the company has “factored that into our business model.”
Although President Obama has signed legislation to increase the nation’s debt ceiling to avert a government default, Frankfort said the debt crisis debates have “dampened confidence towards the U.S.’ economic recovery because it brings to the forefront the issue of our very high level of debt.”
In response to the read on consumer confidence, Frankfort doesn’t see a need to flow less inventory into Coach’s stores since the handbag category is still has grown at a healthy level of 10 percent over the last 10 months. “It will continue at a 5 percent to 10 percent level. There is a consumer trade-off as they make wardrobe choices from apparel to accessories,” Frankfort said.
Coach posted gains in both fourth-quarter and full-year profits. For the three months ended July 2, income rose 3.6 percent to $202.5 million, or 68 cents a diluted share, versus $195.5 million, or 64 cents, a year ago. The year-ago quarter was a 14-week period. Sales for the quarter gained 8.5 percent to $1.03 billion from $950.5 million, which included a 10.1 percent increase in North American same-store sales.
The company opened three North American retail stores, including its first men’s mall store at Copley Plaza, and closed two others. It also opening nine factory stores, of which six are dedicated men’s stores. Devine said during the call that its men’s business is becoming a “comp driver, contributing to the overall productivity in our stores.”
As reported, the company recently signed distribution deals for Brazil and Vietnam, with the first openings targeted for later in the year. In Asia, China remains Coach’s biggest opportunity going forward. At the end of the quarter, there were 66 Coach locations, including 53 sites on the Mainland in 22 cities, 11 in Hong Kong and two in Macau. Coach’s Singapore business is now a direct business, and the business in Malaysia will transition to a direct business as well at the end of fiscal year 2012. Frankfort also said during the call that business in Japan has improved and is trending to where it was before the March 11 earthquake and subsequent series of events.
For the full year, income jumped 19.8 percent to $880.8 million, or $2.92 a diluted share, from $734.9 million, or $2.33, a year ago. The fiscal year ended included a favorable tax settlement of a multiyear tax return examination in the third quarter, the company said. That was offset by contributions of $21 million to the Coach Foundation and $5 million to the Japanese Red Cross. The year-ago period totaled 53 weeks. Sales rose 15.3 percent to $4.16 billion from $3.61 billion.
Brean Murray, Carret & Co. analyst Eric Beder raised his price target for shares of Coach to $76 from $66: “The Coach business model continues to fire on all cylinders, as strong domestic results, aggressive Asian expansion and the rediscovery of the men’s business position the company to drive double-digit, top- and bottom-line expansion in the next two years and beyond.”