WWD.com/business-news/financial/not-afraid-of-the-r-word-469539/
government-trade
government-trade

Not Afraid of the ‘R’ Word

At least one major industry executive isn't pussyfooting around the "R" word: Lew Frankfort, chairman and chief executive of Coach Inc., said the economy is...

View Slideshow

At least one major industry executive isn’t pussyfooting around the “R” word: Lew Frankfort, chairman and chief executive of Coach Inc., said the economy is in the midst of a consumer-led recession.

This story first appeared in the January 24, 2008 issue of WWD.  Subscribe Today.

In an interview Wednesday, Frankfort said the recession began in December and “is unlikely to evaporate any time soon. A tax stimulus package will help, but this recession needs to run its course. Things should start improving in the second half of calendar [year] 2008.”

Frankfort discussed the economy as Coach reported an 11 percent rise in second-quarter profits, beating analysts’ estimates by 1 cent. The improvement helped drive Coach’s shares up 6.2 percent to $29.19 as investors generally rallied Wednesday and took retail stocks along for the ride.

And Coach wasn’t the only company to express concern over the economy even as it remained bullish for the remainder of the year. Compagnie Financière Richemont revealed a spending slowdown in the U.S. and Japan in December as it reported that overall group sales rose 8 percent in the third quarter. The slower sales in America and Japan chilled Richemont’s shares.

French discount group Carrefour, meanwhile, saw a 7 percent sales gain in 2007 and said Wednesday it expects revenues to increase this year by between 6 and 8 percent.

Generally, though, U.S. markets shrugged off any economic worries a day after the Federal Reserve made an emergency 75 basis point cut in interest rates. While European markets were flat or down on the day, at the bell, the Dow Jones Industrial Average added 298.98 points, closing up 2.5 percent to 12,270.17, while the S&P 500 rose 1.1 percent to 1,338.60. Earlier in the day, the Dow was down more than 320 points.

The S&P Retail Index rose again Wednesday, up 4.2 percent to 410.80, with bargain hunters lifting key retail stocks by between 3 and 10 percent. Big gainers included: Aéropostale Inc., up 12.1 percent to $25.96; The Bon-Ton Stores Inc., up 15.6 percent to $6.97, and Sears Holdings Corp., up 7.6 percent to $107.39. In the department store channel, Saks Inc. gained 4.9 percent to $17.40 while Macy’s Inc. rose 4.6 percent to $25.41.

For the three months ended Dec. 29, Coach’s net income climbed to $252.3 million, or 69 cents a diluted share, from $227.5 million, or 61 cents, in the same year-ago quarter. Sales grew by 21.4 percent to $978 million from $805.6 million. Same-store sales in North America rose 7 percent, with retail stores down by 1.1 percent and factory store sales up 17.7 percent. In comparison, a year ago, comps were up 25.7 percent, with retail stores up 20.8 percent and factory store sales up 33.4 percent.

For the year-end period, the company still expects earnings per share of $2.06 on sales of $3.15 billion, up 20 percent from a year ago. To meet that estimate, second-half EPS is expected at 97 cents on sales of $1.5 billion, an increase of 17 percent from the year-ago period.

Frankfort said Coach expects to be able to deliver on its forecasts, in spite of the economic slowdown, because of its “diversified” business model. “We offer innovative and relevant product to enable a consumer to update her wardrobe. Accessories have a leading role in updating a woman’s wardrobe. Even when she has reduced her apparel spending, she has at the same time increased her accessories spending,” he said.

While some consumers over the holiday season traded down and bought small leather accessories, there were still consumers trading up and buying $400 handbags, the ceo said. During a conference call to Wall Street, Frankfort emphasized the one thing consumers are not doing is trading down from full price to factory store offerings. Michael Tucci, president of the North American retail division, said the $400-and-up category represented 22 percent of handbag sales in 2007, versus 13 percent in 2006.

Coach will continue to introduce new product assortments, but also will include a broader range of smaller-sized bags at “compelling entry price points,” Frankfort said.

Beginning Friday, the company will introduce its new Heritage Stripe collection, featuring coated cotton canvas fabric totes and bags trimmed in leather. The collection is Coach’s first foray into the lightweight PVC fabric arena, a fabrication that Frankfort described as “indestructible.” Upcoming, the firm will introduce its new Francine satchel in March, relaunch SoHo in April and introduce the pleated Ergo for Mother’s Day. Only about 30 percent of its bags are in leather; the rest consists of a mixture of fabric, with leather trim.

One thing the company did during the quarter was readjust its prices on some bags to provide comparability with certain department store discounts that were given to clear inventory for spring goods. Those sales accounted for less than 5 percent of sales, and the company also declined to provide meaningful specifics on whether those sales at the department store level were negotiated up-front or were considered markdown dollars. In addition, the company said costs are going up in China and that the firm is looking at opportunities in lower-cost countries to migrate some of its production.

Coach also revealed plans to open its first global flagship in Hong Kong with distribution partner Imaginex. The 9,400-square-foot store is slated to open this summer at the intersection of Queens Road Central and D’Aguilar Street, at the start of Lan Kwai Fong. Coach president and executive creative director Reed Krakoff is designing the space, which will feature a four-story glass and steel backlit Signature facade, while the interior will have a residential, New York feel with white marble floors inset with black cabochons and solid herringbone planks.

The store will carry a range of limited edition items in addition to a series of exotic hand-numbered bags.

In a statement from the company, Coach International president Ian Bickley said that the store is expected to be one of the highest volume Coach stores in the world. “We intend to grow our Greater China store base from a total of about 50 locations today in Hong Kong, Taiwan, Mainland China and Macau, to about 80 over the next few years,” he said, adding that Greater China has the potential to quickly become the third major market for Coach, following North America and Japan.

The Japanese market was a focus of analysts as Compagnie Financière Richemont, parent of brands including Cartier, IWC, Dunhill and Chloé, reported an 8 percent increase in third-quarter sales to 1.67 billion euros, or $2.42 billion, broadly in line with analysts’ forecasts. Japanese sales fell 6 percent and the U.S. market slowed last month, which sent the company’s stock price tumbling Wednesday morning.

On Wednesday, Richemont shares hit a 52-week low, falling 6.65 percent, to close at 58.25 Swiss francs, or $53.45. The company is listed on the Swiss stock exchange.

The company did not provide its usual outlook for the coming months.

During the three months ended Dec. 31, Asia-Pacific, and, in particular, China and Hong Kong, posted the highest rate of growth — 21 percent. Sales in the Asia-Pacific region accounted for 23 percent of group turnover during the quarter.

In Europe, sales growth was 10 percent, in line with the first six months of the year. In the U.S., sales were flat, due mainly to the weak dollar, and in Japan they dropped by 6 percent, due to what Richemont called a “challenging market.”

However, at constant exchange rates, and not taking into account currency fluctuations, sales in the U.S. grew 10 percent, while sales in Japan grew 2 percent. At constant exchange rates, overall sales at the group rose 14 percent.

In a report on Wednesday, Jacques-Franck Dossin at Goldman Sachs called the latest results “strong.” He also noted that news of the December slowdown in the U.S. and Japan was affecting the stock on Wednesday.

“We are surprised by this, as a slowdown in December should have been expected by the market, after many comments on the matter by luxury retailers,” Dossin said. He noted that, overall, Richemont’s December sales grew by 10 percent.

A Richemont spokesman told WWD that the company was pleased with the quarterly sales. “Sadly, the market is very nervous right now, but from our perspective, the business is in good shape,” he said.

The company did not give any profit figures for the quarter. It plans to publish full-year sales in April, and a full set of financial results after that.

By product category, sales at the specialist watchmakers led the pack with 10 percent growth, followed by the writing instrument firms, with 9 percent, and jewelry, with 7 percent.

The company said Chloé achieved growth of 9 percent in the period. The statement said Dunhill reported “continuing good sales growth,” particularly through its own boutique network, while Lancel’s sales were “marginally lower” than the comparative period.

Carrefour, meanwhile, cited acquisitions and store openings for its 7 percent 2007 sales gain to 92.3 billion euros, or $126.8 billion. For the quarter, sales gained 10 percent to 25.6 billion euros, or $37 billion.

By region, sales in France rose 4 percent while the rest of Europe gained 8.8 percent. Latin American sales increased 46.2 percent, and Asian sales jumped 12.9 percent.

The firm said it expects a sales gain of 6 to 8 percent this year, describing 2008 as “a breakthrough year.” The company added in a statement that it expects “operating profits to grow faster than sales.”

View Slideshow