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Coach Net Up 13.8% in Q1

Company is bullish about holiday sales.

Lew Frankfort, chairman and chief executive officer of Coach Inc., said spendthrift shoppers are turning to accessories to keep their style current — a dynamic that pushed the handbag maker to a better-than-expected 13.8 percent gain in first-quarter profits.

This story first appeared in the October 26, 2011 issue of WWD.  Subscribe Today.

“The handbag and accessories category is vibrant,” Frankfort told WWD. “Consumers are shifting from apparel to handbags to update their wardrobes.”

Sales at Coach’s North American stores and e-commerce operations rose 12 percent in the quarter, which Frankfort said outperformed the U.S. handbag and accessories sector, which grew by 5 to 10 percent.

“Our core consumer is heavily insulated from the sluggish economy,” the ceo said, explaining that Coach’s consumer tends to have a higher income and be more educated and therefore has a lower-than-average rate of unemployment.

Even though the consumer “plans to spend the same as last holiday,” Frankfort predicted Coach would have an “excellent holiday season” as consumers snap up higher-priced limited edition handbags.

The brand’s Madison collection, which includes several bags that retail for $400 or above, was a key driver in Coach’s growth during the quarter.

“The middle and upper-middle classes, the professional classes, are doing a lot better than America overall, and those brands that are able to provide innovation, relevance and perceived excellent value are continuing to thrive,” Frankfort said on a conference call with analysts. “And we, as an accessible luxury brand, are extremely well positioned to do that.”

For the quarter ended Oct. 1, Coach’s profits rose to $215 million, or 73 cents a diluted share. This compared with year-ago income of $188.9 million, or 63 cents a share. Wall Street expected EPS of 70 cents.

Quarterly net sales at the New York-based handbag and accessories maker jumped 15.2 percent to $1.05 billion, from $911.7 million.

Comparable-store sales in North America grew 9.2 percent, while comps in China rose at a double-digit rate.

Asia remained a focus for growth. The company said Monday that it bought back its distribution in Taiwan in order to grow market share in the region. It bought back its distribution in Japan in 2001 and in China in 2008. More recently, the brand bought back its distribution in Singapore in July and plans to buy back its distribution in Malaysia in July 2012.

Coach opened four new locations in China in the quarter and one in Macau, bringing the total in China to 71. The firm operated 723 stores worldwide, according to a recent annual filing with the Securities & Exchange Commission.

Coach now anticipates revenue of $300 million from China this fiscal year, which is on the high end of guidance that it provided in August.

The company plans to focus on developing its business in China and other parts of Asia, as well as expanding the women’s business in North America. The brand will also grow the men’s business, which it regards as a “full-price opportunity.”

“We think, through its high level of product innovation and constant newness, the company will continue to exhibit brand prominence, further resulting in additional market-share gains, higher conversion levels and improved productivity across all segments,” said Brean Murray, Carret & Co. analyst Eric Beder.