Coach Inc. is setting its sights on international as its next avenue for growth.“The global story continues to be quite attractive. The global premium accessories market is growing in the midsingle digits, with China driving a lot of that growth," Coach chief executive officer Victor Luis said in an interview Tuesday after the company posted fourth-quarter results that saw profits nearly double as sales slipped slightly.The executive spies opportunities in Japan, China and Europe for its newest addition, Kate Spade, and is working with the brand's creative team to ramp up product innovation in the core handbag and accessories categories. He noted the Kate Spade brand does well in ready-to-wear and in technology-related products.Luis also singled out significant opportunity for Kate Spade in Japan — the second-largest handbag and accessory market in the world — where the “brand already has a strong presence, but is still underpenetrated," he noted.Coach's international growth for the last few years has been primarily generated in China, Southeast Asia, Europe and a few of the developing markets, such as the Middle East. The company is now looking to expand further in Russia and India through international partners.The bullish outlook on international contrasts with a muted North American market that has been flat for a few quarters, due in part to the pullback on product at the department store level, whether by Coach or its competitors.Now a little more than three months into the integration of Kate Spade, Luis said the parent company is building a solid foundation for the brand by “taking a page or two from Coach’s own playbook.” That refers to pulling back on promotions and on wholesale distribution.One big change will be on the licensing side, Luis said, noting that Kate Spade has about 20 licenses. Some product categories that remain small will likely be jettisoned when the licensing program ends, possibly to be replaced by new categories where there’s bigger opportunity for the brand, Luis said, with a focus likely on fashion and accessories categories.Luis is currently acting as interim ceo for the brand, succeeding Craig Leavitt, who left three weeks ago. Leavitt was ceo of the publicly traded company before its acquisition by Coach in a cash transaction valued at $2.4 billion. Luis said it would take 12 to 18 months to complete the integration of Kate Spade.When asked whether that’s the time frame — 12 to 18 months out — for when it could do its next big acquisition, Luis said the company’s “capital allocation policy is in investing in its current brands.” He added that the company is “looking and is always open to growth through an acquisition when it makes sense.” Luis also noted that the company’s independent board continually has discussions regarding acquisition opportunities.During a conference call on Tuesday, Luis, chief financial officer Kevin Wills, and Coach brand ceo Joshua Schulman, detailed that the Coach brand opened seven net locations globally during fiscal 2017, bringing the total of directly operated locations worldwide to 962. For Stuart Weitzman, there were six net locations opened, with 81 directly operated stores globally.For the Coach brand, Schulman told WWD that the company has been elevating the product line for bags above the $600 price point, and can now “cascade that level of innovation across all levels of price and function across the pyramid.”The company is aiming at the $300 to $400 price point zone to attract a broader array of consumers, Schulman said. “This is a classic good, better, best strategy. We are outperforming on our best and we are incredibly proud of that. We want to keep the position we earned there, but there are opportunities to fill in on [the other] price points,” he said.The Coach brand also introduced its new women’s footwear assortment in stores and in the wholesale channel, the first since taking back its footwear license. The line has 100 stockkeeping units for pre-fall, with limited wholesale distribution of 120 doors. The sku count will grow to 175 for spring, which will feature a more dressy assortment.For the Stuart Weitzman brand, creative director Giovanni Morelli is to showcase his first footwear collection in April 2018, and his new handbag line for fall 2018.For the quarter ended July 1, net profits at Coach Inc. increased to $151.7 million, or 53 cents a diluted share, from $81.5 million, or 29 cents, a year earlier. Adjusted profits rose to $142 million from $126 million, or 50 cents a diluted share. Net sales slipped 1.8 percent to $1.13 billion from $1.15 billion. Comps for the Coach brand in North America rose 4 percent, representing its fifth consecutive quarter of comps gains.Wall Street was expecting diluted EPS of 49 cents on sales of $1.15 billion.The company also guided fiscal 2018 adjusted EPS to between $2.35 to $2.40, on revenues of between $5.8 billion to $5.9 billion. That compared with Wall Street’s consensus estimate for fiscal 2018 of diluted EPS of $2.49 on revenues of $6.04 billion.Investors reacted by sending shares of Coach down 15.2 percent to close at $40.64.Jefferies analyst Randal J. Konik has a hold rating on shares of Coach. While he said of the quarter "we liked the positive comps and tight expense discipline," he also saw what he considers yellow flags ahead. The analyst said there's a chance everyone now expects Coach to have continued positive comps after five in a row, but said the comparables are "getting tougher."Konik believes the $400-plus bag penetration is near its peak, and that going forward the comps would have to be fueled by an improving outlet business. According to the analyst, that is "lower-quality revenue improvement and the market is unlikely to ascribe a luxury multiple to this type of growth." He also was concerned that the North American full-price business might be stalling.Another concern for Konik is the Kate Spade brand, noting that to "assume the standing of the [Kate Spade] brand will stay very strong for the next few years is a tough call, especially when the [brand's] customers are Millennials and we all know Millennials are fickle." Konik saw risk to the topline in the Kate Spade story, and his concern wasn't helped by a coupon that Kate Spade sent around Tuesday morning offering up to 75 percent .Konik concluded that the core Coach revenue improvements may be harder to come by, and Kate Spade "revenues trends could be erratic."
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