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Coach Profit Rises 18%

Strength in China offsets weakness in Japan as third-quarter sales and profits surge.

Coach Spring 2011

Asia’s two largest economies balanced each other out in Coach Inc.’s third quarter.

Growing sales in China helped the New York-based accessories firm offset the loss of about $20 million in revenue from Japan’s catastrophic earthquake and generate an 18 percent gain in quarterly profit.

In the three months ended April 2, net income was $186 million, or 62 cents a diluted share, 2 cents better than the analysts’ consensus estimate and better than the $157.6 million, or 50 cents, registered in the year-ago quarter.

Sales rose 14.5 percent to $950.7 million from $830.7 million. The company said indirect sales rose 14 percent to $119 million, reflecting growth in shipments to U.S. department stores and international wholesale. Direct-to-consumer sales rose 15 percent to $832 million, while North American comparable-store sales rose 10.3 percent.

Sales in Japan fell 9 percent on a constant-currency basis, while dollar sales were essentially the same. The company said sales in China “remained robust” as point-of-sale volume comped at a “double-digit rate.”

The company temporarily closed seven of its 174 stores in Japan in March and reopened three earlier this month. The four stores still shuttered are expected to reopen this summer, Lew Frankfort, chairman and chief executive officer, said.

In addition to the revenue loss, the company estimated that the events in Japan exacted about a two-and-a-half-cent toll on earnings per share.

On a conference call with investors, Michael Devine, chief financial officer, said that with Japan “the highest gross margin region, losing that $20 million was hurtful to the gross margin rate, but relatively immaterial.”

He explained that the company would have reported a “modestly higher gross margin rate,” but because that operation is a “small percentage of the total company’s business [we] were able to absorb it.”

Third-quarter gross margin came in at 72.8 percent of sales, down from 74.1 percent in the 2010 quarter.

Victor Luis, president of Coach international retail, said on the call that the firm is likely to see continued effects from the tragedy in Japan over the next few months, primarily because of reduced traffic as infrastructure problems remain in the northern and eastern parts of the country.

Frankfort said the firm’s fastest-growing business is still China, where the company has 55 Coach locations, with 44 on the Mainland in 18 cities. Emphasizing the opportunities in the region, the ceo noted that there are nearly 120 cities in China with a population of 1 million or more.

Even though there’s been talk about price inflation in China, particularly in the real estate markets, that hasn’t impacted price points for Coach products. Frankfort told WWD the firm has a “global pricing strategy. Inflation has not impacted our retail prices in China.”

In addition to China, other growth opportunities are in Korea and Taiwan. “Today each one represents $100 million at retail,” he said.

In response to an analyst question during the conference call, Devine said that, because of counter sourcing efforts, Coach doesn’t expect as dramatic an impact from inflation as might be experienced by other firms. While leather hasn’t been under the same cost pressures as cotton and other commodities, the cfo noted that wage inflation in China is the bigger issue and the firm has battled that by moving product into lower-cost countries.

Frankfort told analysts that the U.S. market for handbags and accessories rose 5 percent to 10 percent in the third quarter, and Coach estimates that the category will increase to $9 billion this year, surpassing the peak reached three years ago.

Another area of global expansion for Coach is Europe, specifically in France and Spain. The company also has a store in the U.K. Frankfort told WWD that the plan is to have a “multichannel” distribution model in each country, with shop-in-shops augmented by both freestanding and outlet stores.

The company also increased its annual dividend rate 50 percent, to an annual rate of 90 cents a share.