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Coach Shares Fall on Holiday Slump

The handbag maker cited increased competition and challenging macroeconomic factors for its weaker-than-expected second-quarter results.

NEW YORK — Shares of Coach Inc. slid 16.4 percent Wednesday to $50.75, after the handbag maker said sagging holiday demand and increased competition in the accessories market contributed to lower-than-expected second-quarter earnings. The New York-based brand also registered negative comparable-store sales in North America for the quarter, marking only the third time in 11 years that it recorded a negative comp.

 

Chairman and chief executive officer Lew Frankfort told analysts on the conference call that the company experienced “weakness” in its women’s business here and globally, due in part to “heightened promotional activity,” which “built throughout the quarter” and “became aggressive” in department stores.

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Looking at the bigger picture, Frankfort said he’s focusing on “transforming” Coach into a “global, lifestyle brand anchored in accessories.” Coach’s new strategic direction was first reported in WWD Wednesday.

Coach introduced Legacy, a dual-gender, upscale footwear, accessories and apparel collection last year, which is a sort of precursor to a fuller expression of the brand’s evolution.

“We’ve been strengthening our teams to enhance and build out the Coach experience through product, retail environments and integrated marketing,” the ceo noted. “This holistic approach will continue to add excitement and cachet to the Coach brand. We’ve demonstrated the ability to offer a lifestyle assortment, including categories such as outer wear, shoes, jewelry, watches, eye wear and fragrance.”

The evolution, which will be in full bloom by holiday 2013, puts the company in even more direct competition with other lifestyle brands such as Michael Kors and Tory Burch, both of which have chipped away at Coach’s still-dominant share of the North American handbag market.

Coach said the lifestyle push won’t impact future earnings, as it has “built in sufficient capital to address store renovations and new store concepts, and improved and different fixturing.”

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Frankfort acknowledged the challenge, as his brand took a few hits last quarter while it fought to keep its prices steady amid a highly promotional holiday season.

He blamed the results on a confluence of factors, ranging from the effect of Hurricane Sandy to news surrounding the fiscal cliff.

Net income for the period ended Dec. 29 edged up 1.5 percent to $352.8 million, or $1.23 a diluted share compared with year-ago income of $347.5 million, or $1.18 a share. Sales for the quarter grew 3.8 percent to $1.50 billion from $1.45 billion.

The brand fell short of analysts’ earning per share estimates of $1.29 and revenue projections of $1.60 billion.

While fewer markdowns kept gross margins flat for the quarter at 72.2 percent of sales, Coach’s refusal to cut prices contributed to its 2 percent decline in quarterly comps in North America. The only other times Coach recorded negative quarterly comps was in the second quarter of 2002, following Sept. 11, and in January 2009, following the financial collapse. Nonetheless, the flagging comps were offset by strength in Coach’s international division, led by double-digit same-store sales growth in China.

North American sales increased 1 percent to $1.08 billion from $1.07 billion, as international sales expanded 12 percent to $411 million from $368 million last year.

Frankfort said China is on track to generate at least $400 million in sales this year. He also said that Coach’s men’s division is on course to earn sales of more than $600 million globally in fiscal 2013, up 50 percent from last year.