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Coach Q3 Beats Wall Street’s Expectations

Men’s, footwear and China are fueling growth opportunities.

A view of the Coach store.

NEW YORK — Shares of Coach Inc. rose 9.8 percent after the firm posted third-quarter results, reflecting a bounce-back from the second quarter’s results, which were impacted in part by sagging holiday demand.

According to Lew Frankfort, chairman and chief executive officer, in a telephone interview, the latest quarterly results also reflect improved consumer sentiment about where the economy is headed. In January 2008, Frankfort was among the first to call the pull-back a “consumer-led recession.”

For the three months ended March 30, net income rose 6.2 percent to $238.9 million, or 84 cents a diluted share, from $225 million, or 77 cents, a year ago. Analysts were expecting 80 cents a share. Net sales rose 7.1 percent to $1.19 billion from $1.1 billion. North American sales rose 7 percent to $792 million from $738 million last year. Comparable-store sales rose 1 percent. Direct sales jumped 8 percent, while international sales rose 6 percent to $382 million from $359 million, boosted in part by a 40 percent gain in sales in China. Among the line introductions in the quarter that were well received were the Saffiano tote and the Phoebe shoulder bag.

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For the nine months, net income rose 3.3 percent to $813.1 million, or $2.84 a diluted share, on a net sales gain of 6.8 percent to $3.9 billion.

Shares of Coach closed at $55.55 in trading Tuesday on the New York Stock Exchange.

Frankfort, whose firm conducts its own internal quarterly survey of Coach customers, said, “Consumers are feeling somewhat better. The fiscal cliff concerns [at the beginning of the year] have been invisible to people. For the time since the recession, more than a majority, 53 percent, of consumers said they feel the economy is staying the same or getting better.”

Frankfort noted the reduction in savings by shoppers has allowed them to “continue to spend at levels of growth equal to what it was previously in our category,” which was up 10 percent two quarters ago and was up in the high-single digits in the current quarter.

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The chairman believes the confidence of consumers and the spending rate are likely to continue, despite fear by some of a slowdown in the summer as more federal government workers get furloughed as part of enforced cuts to right the budget. “Consumers understand that politics are involved. The next stage of the sequestration will not have a material impact on attitudes and spending,” Frankfort said.

As for a possible timetable on when they hope to hire a new creative director to succeed Reed Krakoff, Frankfort said, “We intend to move rather quickly. It depends on who we meet.”

Executives in a conference call following the earnings results told analysts that the company is seeking a collaborative individual who can work across different channel geographics and partner with a very strong team. While ideally the individual can oversee the global men’s and women’s design effort, the company said depending on who the individual is, “we’ll adjust the organizational structure.”

As for the brand’s transformation into the lifestyle category, Frankfort clarified on the call expectations regarding Coach’s ready-to-wear collection.

“I think the context you really need to think about on ready-to-wear is that we’re not looking to sell tops and bottoms. This is not a full launch into ready-to-wear. This is a very careful, methodical approach to create a story of who the Coach woman is, and our intention in all of our lead stores is to provide a capsule group of ready-to-wear, with outerwear, and it’s going to be a tiered structure,” he said.

The company also is contemplating including dressing rooms in a small number of key locations.

The two initial categories Coach is focusing on for the transformation are men’s and footwear. According to president and chief commercial officer Victor Luis, who will succeed Frankfort as ceo in January, the men’s business remains on track to double to more than $600 million this year, up 50 percent. In fact, many stores in China are dual gender stores, in part because of the growth potential for men’s in the country.

Luis said in a telephone interview that many store locations in the U.S. have “men’s and women’s side-by-side,” with a door acting as a pass-through between the store sites. Merchandise in other locations are tweaked to showcase a smaller component of the men’s business. Some have a small space allocated to the footwear salon, and there’s a small rack for the outerwear selection. Generally the mall stores in the U.S. average 2,000 square feet, the same range as the new stores opening in China.

Luis told analysts that sales in China are now projected to total $425 million, up from prior guidance of $400 million. The company has also acquired its partner’s 50 percent interest in its businesses in the U.K. and Europe, with the transaction expected to close in July.

Coach is also focusing on expanding in other regions with existing partners: Latin America, which includes Mexico, Brazil, Venezuela, Colombia, Panama, Chile and Peru; Asia-Pacific, and the Middle East.

The company recently initiated a members-only program for its factory customers, allowing them the convenience of shopping online for select merchandise of limited supply. The price points are the same as the discount in the factory stores.