Coach Profits Rise in Third, Sales Up 36%

Coach Inc.’s third-quarter profit earnings skyrocketed past both year-ago levels and analysts’ expectations, lifting the stock to a new 52-week high.

NEW YORK — They’re in the bag.

This story first appeared in the April 23, 2003 issue of WWD.  Subscribe Today.

Coach Inc.’s third-quarter profit and sales results, that is, as earnings skyrocketed past both year-ago levels and analysts’ expectations, lifting the stock to a new 52-week high. Its market capitalization also was helped by elevations of its quarterly and year-end earnings estimates and its plan to scale the $1 billion revenue mountain next year.

Investors snapped up shares of the firm like its customers do handbags. Coach’s shares rose $4.04, or 10.5 percent, to close the day at $42.54 in New York Stock Exchange trading. Its previous high was on April 7, closing that day at $40.03. Shares reached a 52-week low of $17.19 last July 24.

The company, which operates 150 retail stores and 75 factory outlets in the U.S. and 92 locations in Japan, said profits soared 169.6 percent to $31.9 million, or 34 cents a diluted share, for the three months ended March 29, ahead of analysts’ revised consensus estimates of 29 cents. Year-ago earnings were $11.8 million, or 13 cents, including a restructuring charge for the closure of a manufacturing facility in Puerto Rico. Excluding the charge, year-ago earnings were $14.7 million, or 16 cents. Overall revenues for the quarter rose 36.4 percent to $220.4 million over $161.6 million.

“By addressing an increasing variety of usage, including occasion and everyday needs, our most significant gains have been realized during the nonholiday period,” Lew Frankfort, Coach’s chairman and chief executive, said on a morning conference call. “In fact, this fiscal year, less than 50 percent of our earnings will come from the holiday quarter.”

During the just-completed quarter, sales results in each of Coach’s distribution channels grew. Direct-to-consumer sales, which consist of sales at U.S. Coach stores, increased 29.5 percent to $121.6 million from $93.9 million, and rose 14.1 percent on a comparable-store sales basis, with retail stores up 25.5 percent and factory stores sales up 2.4 percent. Indirect sales rose 45.9 percent to $98.8 million from $67.7 million, with increased contributions from all businesses, including Coach Japan, international wholesale, U.S. department stores and special markets.

“Our exceptional comps in retail stores reflect gains in markets and are due to both higher traffic and higher conversion rates, as we continue to attract a consumer more predisposed to purchase,” Frankfort said. In addition, he noted comps in Japan also grew by double digits.

Driving quarterly sales, Frankfort said consumers “enthusiastically embraced our transitional and spring offerings, including new styles and colors in Hampton leather and Ergo handbags and our mini-Signature logo collection.” In addition, he said that the Soho twill and the sporty Hampton weekend group enjoyed excellent sell-throughs in March.

Frankfort said there is a “strong pipeline of fresh and innovative product planned” for the next several months, including a pastel Signature group and recently introduced straw basket totes. He noted these totes will anchor the black-and-white Mother’s Day assortment, which will, for the first time, also comprise many pre-boxed items.

Frankfort outlined a number of strategies that focus on sustaining the company’s growth, including increasing market share by building on its unique position as America’s “accessible luxury lifestyle brand” by emphasizing more special-occasion and weekend products and offering items with a broader range of prices. He explained Coach is endeavoring to enhance the shopping experience, for instance, by offering protective cloth bags with each handbag purchased and placing coffee table-quality catalogs in every Coach shopping bag.

Coach also plans to add 100 U.S. retail stores over the next four to five years, lifting its count to at least 250, and to continue to elevate gross margins through more efficient sourcing and logistics and the leveraging of its expense base.

In a research note raising her 2003 earnings estimate to $1.55 from $1.48, Goldman Sachs analyst Margaret Mager wrote, “Coach is a unique franchise that has limited direct competition and will continue to grow through new store openings in the U.S. and Japan as well as through comp-store sales increases as the company gains market share.” She noted that accessories is a lucrative business especially “when the brand equity is a strong as it is for Coach.”

Looking ahead, Michael Devine, chief financial officer, said for the fourth quarter ending June 28, Coach is expecting earnings of at least 28 cents, versus consensus estimates of 25 cents, and sales growth of more than 25 percent to at least $215 million, including a comp increase of at least 10 percent. For 2003, he said he is targeting earnings of at least $1.54, better than the $1.47 analysts are currently anticipating, and a sales increase of more than 30 percent, to more than $935 million, as well as double-digit comp gains in both U.S. and Japanese stores. He also said in 2004, earnings are projected to be at least $1.80 with sales to increase by at least 15 percent to $1.08 billion with at least a mid-single-digit comp gain.

“This isn’t a comp story,” Frankfort said in answering an analyst’s question about whether the company can continue to deliver such stellar results. “We are into gaining sustained market share and everything we are about goes back to our unique position. We are the market leader with growing market share each year. We have a distinctive proposition, listen to [the] consumer, are innovative and work hard to provide relevant products.”

For the nine months, income grew 70.4 percent to $116.8 million, or $1.26 a diluted share, versus income in the comparable period last year of $68.5 million, or 76 cents. Total sales vaulted 31.7 percent to $721.7 million over $548 million.