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Coach Net Slips, Firm Upbeat on Holiday

Coach Inc. projected an improved holiday season despite lower first-quarter profits.

The optimism registered Monday about the European luxury sector made a stop in North America on Tuesday as Coach Inc., the bastion of accessible American luxury, projected an improved holiday season despite lower first-quarter profits.

While net income fell 3.4 percent, Coach managed to surpass analysts’ estimates and at the same time provide an upbeat assessment of the direction of its more aspirational luxury consumer.

“In our most recent quarterly survey for North America, the number of consumers who said they intend to purchase Coach over the next 12 months has increased dramatically from earlier surveys,” Lew Frankfort, chairman and chief executive officer, told WWD. “They are feeling less pessimistic about the economy.”

Frankfort disclosed that 32 percent of the 7,000 people surveyed recently said the economy will stay the same or get better, compared with just 16 percent who were polled in January. “There is improvement in their outlook,” the ceo said. “Attitude precedes behavior, and consumers need to feel better for a sustained period before they change their behavior. I think we will see a stronger holiday than we did last year.”

Frankfort added the lower price points that were the result of the firm’s rebalancing of its product mix and pricing strategy have helped provide consumers with the right “combination of compelling product at exceptionally attractive pricing.”

Coach’s positive take on holiday followed LVMH Moët Hennessy Louis Vuitton’s report Monday of improving business trends, even in light of lower third-quarter revenues. However, it wasn’t sufficient to prevent investors from taking a bite out of Coach’s stock, which declined $1.10, or 3.2 percent, to $33.41.

According to Frankfort, Coach’s greatest achievement this year has been its ability to anticipate and adapt to the “new normal” in which the consumer is value-driven. “When [the country] emerges from the recession, companies that have strong franchises and are able to give consumers great product at excellent prices will be rewarded,” he said.

For the three months ended Sept. 26, net income fell to $140.8 million, or 44 cents a share, from $145.8 million, or 44 cents, in the year-ago quarter. Wall Street expected EPS of 39 cents, according to Yahoo Finance.

Sales in the quarter rose 1.2 percent to $761.4 million from $752.5 million despite a one-third drop in the wholesale business. Gross margin declined to 72.3 percent of sales from 74.2 percent in last year’s first quarter. Direct-to-consumer sales rose 10 percent to $654 million. Comparable-store sales at North American stores dipped 1.1 percent. Sales in Japan fell 3 percent on a constant currency basis but rose 11 percent in dollars, while comps in its China retail sites increased at a double-digit rate. Indirect sales fell 33 percent to $108 million, with the decline due primarily to reduced shipments into U.S. department stores.

The company said it was able to reduce its average unit cost by 8 percent due to improved sourcing. Frankfort said the reduced costs should continue through the rest of the fiscal year. He noted the rebalancing of price points is part of the firm’s long-term strategy. “We may feel more pressure on the cost side during fiscal year 2010, [but] we will offset that through improved sourcing,” Frankfort told WWD.

Coach, which saw increases in sales at its domestic factory stores in the U.S., opened two factory stores in China during the past quarter. It is planning to open a 7,000-square-foot China flagship in Shanghai this spring. The company will also open its first group of men’s stores in Japan in the spring. A men’s store is already set to open in New York in May. The site is next door to the Legacy boutique on Bleecker Street.