By  on April 25, 2007

Coach Inc. isn't about to rest on its laurels.

In reporting earnings that soared 37.8 percent in the third quarter, Coach on Tuesday outlined plans for future growth via two new lifestyle collections, a second fragrance line and new stores in the U.S. and overseas.

The company also said it continued to benefit from strength in the accessories market.

"The accessories category continues to grow at a 20 percent clip," said Lew Frankfort, chairman and chief executive officer, in a telephone interview. "There is enormous interest in accessories. The leading role that accessories is playing in women's wardrobes is extending now to moderate segments, and there are dramatic increases in the levels of consumers who are trading up [because of the] recognition on how accessories can update one's wardrobe."

For the three months ended March 31, net income leapt to $150 million, or 40 cents a diluted share, from $108.8 million, or 28 cents, in the year-ago quarter. Wall Street analysts were expecting 38 cents in earnings per share. Sales gained 30.3 percent, to $625.3 million from $479.7 million. Same-store sales rose 20 percent; retail stores increased 15.1 percent and factory stores rose 26.6 percent.

For the nine months, net income increased 33.6 percent, to $503.1 million, or $1.34 a diluted share, from $376.6 million, or 96 cents, in the year-ago period. Sales climbed 27.8 percent, to $1.96 billion from $1.53 billion.

During a conference call to Wall Street analysts, Frankfort said the company was shutting its corporate accounts business, in which Coach sold products to distributors for corporate gift-giving and incentive programs. The chairman said Coach found out that some goods were diverted to unauthorized channels, such as Costco, and that the "only way to control where [its] product was sold was to exit this business."

The first of Coach's upcoming launches will be the new lifestyle collection Bleecker, to hit stores in October. This will be followed by a second lifestyle collection, called Heritage Stripe, which will be fully launched next spring. A second fragrance line also will be introduced next spring.

Frankfort said the two lines were the company's response to voids in the market or to customer needs. "In one case, our consumer expressed considerable interest in a lighter-weight, leather-based collection inspired by our history, and Bleecker offers that. In terms of Heritage Stripe, it met a functional void since we don't have a comprehensive lifestyle collection of durable, chic, sporty totes," the ceo said in the interview.According to Frankfort, Bleecker will be primarily a "leather-based collection inspired by the company's best-selling icons reinterpreted in a modern way." The leather will be noticeably lighter, and will feature a tattersall lining. "The average Coach bag is $275, the average Legacy is $425 and the average for Bleecker is $350. All are [affordable] luxury at less than half the price points of the average European competitor," the ceo said.

Heritage Stripe will feature coated cotton canvas that is planned as a tote collection for weekend and travel use.

As for fragrance, the company will be introducing a second scent next spring and will add one body care item and a few beauty accessories in the fall, Frankfort said.

He said the recently launched Ergo line of streamlined, lightweight bags had been doing "extremely well in Japan and in the U.S." Sales of Ergo in Japan were led by leather bags, which Frankfort said was a departure for Japan; sales there typically are led by bags featuring Coach's Signature fabric. In the U.S., 60 percent of sales of Ergo bags and accessories have been leather-based and 40 percent were of the Signature fabrication.

Coach, which believes it can sustain a 500-store base in North America that includes up to 20 in Canada, plans to add 40 retail stores in North America in each of the next several years, and will accelerate store openings in Canada, where there are now only four sites. During the current fiscal year, Coach will add 19 net new locations in Japan, and plans to expand brand awareness in emerging markets in greater China and in South Korea. Six net new locations were opened during the third quarter in the Middle East, and for fiscal year 2007 the company expects to open 30 net new international locations, with another 30 new sites internationally via distributors in greater China, southeast Asia and the Middle East.

As for the customer profiles and preferences overseas, Frankfort said they were similar to those in North America. "Of the Asian consumers, the younger customers favor smaller bags in Signature and the older, more sophisticated consumers prefer Legacy. They tend to be more discriminating. The price points are not an issue as the prices are positioned on average less than half of the price points of our European competitors."Despite the strong performance in the quarter, shares of Coach Inc. fell 5.79 percent Tuesday, to $50.26, as investors sold the stock due in part to broader concerns over consumer spending as well as earnings estimates from Coach that were below analysts' consensus estimates. Trading was particularly active, with over 10.2 million shares changing hands, compared with a three-month trading average of 3.4 million shares.

Coach is forecasting 40 cents-a-share profit for the fourth quarter. For fiscal year 2007, the company is projecting earnings per share of $1.67 on a continuing operations basis, up from last year's $1.19, using the same basis. Wall Street consensus is $1.72, which Coach said included 10 cents per share contribution from discontinued operations, lowering the adjusted consensus to $1.62 on a continuing basis.

For fiscal year 2008, Coach is estimating an EPS of at least $2.02. Wall Street consensus pegged fiscal year 2008 EPS at $2.09, but Coach estimated that the consensus figure included an 11-cent, per-share contribution from discontinued operations, bringing down the adjusted consensus to $1.98 for continuing operations.

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