North America Drags Down Coach Inc.

The accessories brand is in the midst of what it hopes is a transformation, but it is hitting a few bumps in the process.

Coach’s new packaging and logo.

NEW YORK — Coach Inc. is a work in progress.

This story first appeared in the October 23, 2013 issue of WWD.  Subscribe Today.

The accessories brand is in the midst of what it hopes is a transformation to build on what has been decades of mammoth growth, but it is hitting a few bumps in the process.

Shares of Coach fell 7.5 percent to $50.10 at the end of trading Tuesday, following a less-than-stellar first-quarter earnings report, in which the retailer posted a 1.6 percent dip in income and a 0.9 percent decline in sales.

As the economy slowly battles back, spendthrift consumers have sought out more fashion-forward products at an affordable price. For the 72-year-old brand, that has translated to a loss in market share to buzzier rivals such as Michael Kors Holdings Ltd.

“One can say we were slow to respond to the evolving competitive experience here in North America,” said president and chief commercial officer Victor Luis, who will become chief executive officer in January. “But that is no longer the case.”

The incoming ceo told WWD that the coming months, through 2014, will prove momentous for Coach as it is in the process of rolling out new store designs, quarterly capsule ready-to-wear and accessories collections and fresh marketing and advertising campaigns. This will all come to a head next fall, when the first collection of newly appointed executive creative director Stuart Vevers hits stores.

“You will see proof points of our strategy,” said Luis, who declined to forecast when Coach’s financial results would begin to ramp up again. “We’re not going to call a change in trend until we see it in our North American stores, so we aren’t providing any guidance. What we are seeing is reduced traffic, across our full-price fleet especially.”

For the period ended Sept. 28, net income totaled $217.9 million, or 77 cents a diluted share, compared with year-ago income of $221.4 million, or 77 cents a share.

Quarterly sales slid 0.9 percent to $1.15 billion compared with sales of $1.16 billion in the year-ago quarter. Analysts expected earnings per share of 76 cents on sales of $1.19 billion.

In North America, quarterly comparable-store sales fell 6.8 percent, while total revenue declined 1 percent to $778 million. International revenue declined 0.5 percent to $365 million from $367 million, due in part to a 2 percent dip in sales in Japan, which was exacerbated by a weak yen. Sales in China rose 35 percent, as comps increased at a “double-digit” rate.

Frankfort, who led the earnings call for the last time as chairman and ceo — a post he has held for 18 years — called out Coach’s growth in secondary businesses and regions.

“We continued to drive excellent growth in emerging markets and Europe as well as in the men’s business and developing lifestyle categories, such as footwear,” said Frankfort, who will become executive chairman in January.

Coach said it expects the men’s business, which is roughly $600 million, to expand to about $700 million in fiscal 2014. In three years, it expects the business to hit the $1 billion threshold. Footwear is also a growing category, according to Francine Della Badia, president of North American retail.

“Footwear, which relaunched this spring in about 170 full-priced locations, doubled in penetration from about 4 percent to over 8 percent at higher AURs [average unit retail] reflective of the compelling assortments,” she said. “This category performance highlights our consumers’ desire for more emotional trend-right fashion product. We are seeing strong performance across heels, flats and booties. We’re focused on building our market share within the fragmented, nearly $25 billion global premium footwear category.”

Within the handbag segment, Coach touted its Borough bag, a new classic square tote that comes in three sizes, in either pebbled or polished calfskin leather, and in different colors. The bag is at the center of the brand’s latest campaign, featuring models Karlie Kloss and Liu Wen, both of whom appear in print and digital ads wearing head-to-toe Coach looks.

Expressing that there’s much work ahead for the brand, Luis called Coach’s battle a “multiyear” journey.

As a result, the company expects to deliver flat-to-low-single-digit sales growth in constant currency. In North America, Coach predicts its comp run rate to be down high-single digits for the balance of fiscal 2014.

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