By  on October 24, 2007

Shares of Coach Inc. fell 11.8 percent in trading Tuesday after the company warned traffic at its U.S. retail stores was slowing. The warning came as the accessories firm posted a first-quarter profit that beat Wall Street analysts' consensus estimates by 1 cent.

Coach on Tuesday posted a 23.2 percent jump in first-quarter income, and a 27.8 percent spike in sales. For the three months ended Sept. 29, income was $154.8 million, or 42 cents a diluted share, compared with year-ago earnings of $125.6 million, or 34 cents. On a continuing operations basis, income rose by 34.3 percent to $154.8 million from $115.2 million. Sales grew to $676.7 million from $529.4 million.

The company said direct-to-consumer sales jumped 26 percent to $508 million from $404 million last year, while same-store sales rose 19.3 percent, with retail stores up 10.8 percent and factory store sales skyrocketing 27.3 percent. Sales in Japan increased 17 percent on a constant-currency basis, while dollar sales rose 15 percent adjusted for a weaker yen. Indirect sales climbed 35 percent to $169 million from $125 million a year ago.

The big news for investors was the warning Coach issued regarding weakened store traffic. That caused a sell-off of the stock, which closed at $36.58 in trading Tuesday on the New York Stock Exchange. More than 33.5 million shares traded, compared with a three-month average volume of 5.2 million. Intraday trading ranged from a high of $38.94 to a low of $36.15.

In a telephone interview, Lew Frankfort, chairman and chief executive officer, said the traffic warning for U.S. retail stores applied only to same-store sales, and that the company wanted to be cautious in light of the tough retail environment and since the current quarter's sales are also up against very high comps of 21 percent last year. With data from just 15 percent of the current quarter in, traffic so far is up 10 percent within the same stores that contributed to last year's comps, according to the ceo.

Sales at Coach factory stores are better than usual, due to the unseasonably warm weather in recent weeks, he said.

"Our business is extremely strong, driving [sales to an expected gain of] 20 percent this quarter and the rest of the fiscal year's topline. The bottom line is expected to grow at the same level," he said.In addition, Frankfort pointed out that the company is seeing a "higher conversion rate, even with lower levels of traffic. There is more buying once they come to our store."

Coach attributes its continued success in part to favorable reception by consumers to the monthly product launches starting in July with Carly, followed by Hamptons and Legacy and its latest, Bleecker.

For holiday, Frankfort said, "Bleecker is the cornerstone of our marketing activities. For the first time we are offering fragrance and body lotion. [We are also offering a] much expanded assortment of jewelry in all of our stores."

Frankfort doesn't see a slowdown in customer acceptance of the $400-plus handbag. If anything, acceptance of that price point and higher ones is only going to grow. Bags over $400 represented 25 percent of sales in the last quarter, which is a doubling of handbag sales in that range in the year-ago period, he said.

"We see an enormous white space between $400 and $1,000. The European luxury price is over $1,000 a bag, and our average is just over $300. We've seen a very strong interest among our consumers wanting a more elevated product with better materials and a finer make at an attractive price point between $400 and $800," the ceo said.

He also noted that consumers at the entry price point are eyeing wristlets and pouches, while the stylish affluent consumer is looking for the elevated product.

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