NEW YORK — “Consumers are looking for newness. There’s a lack of excitement in the market today.”
That’s the word from Coach Inc.’s chief executive officer Victor Luis on the problems inherent in the handbag market. In an interview following the company’s posting of fourth-quarter results, Luis explained that Coach is “focused on differentiating ourselves. Today, there’s a lot of competition driving a lot of similar product. Consumers are looking for something new to inspire them,” noting that the inspiration could come via everything from a store concept to the brand experience.
For Coach, it’s been a work in progress as the company pushes ahead on its strategic initiatives to transform the brand. So far 150 of its current total of 1,000 stores have been renovated in the past six to seven months. The company is also right-sizing its store count as leases come up, with 75 stores shuttered so far and another 15 slated to close in fiscal 2016.
While there are probably more growing pains ahead as Coach continues its $400 million to $500 million re-platform investment over a three-year period — it’s already completed the first year — Luis also is seeing enough green shoots to predict that comparable-store sales, which have seen declines, will see positive growth by the fourth quarter of fiscal 2016, or this time next year. That’s when about 40 percent of the store fleet will showcase the new concept versus the current store base at around 15 percent.
In the short term, though, Coach continues to see tough times. For the quarter ended June 27, the company reported fourth-quarter profits declined by 84.4 percent, following an 11.6 percent decrease in sales. The quarterly profit received a boost from its $574 million acquisition of Stuart Weitzman in May.
The company said net income for the fourth quarter ended June 27 was $11.7 million, or 4 cents a diluted share, versus $75.2 million, or 27 cents, a year ago. On a constant currency basis, net income for the quarter was $85 million, with earnings per diluted share at 31 cents, excluding transformation-related charges and acquisition costs. Weitzman contributed $2 million to net income.
Net sales were $1 billion compared with $1.14 billion a year ago. That included an intentional reduction of more than $300 million in sales due to the company’s decision to have fewer promotional events, as well as reduction in the e-outlet flash-sale events to two a month from three a week, according to Luis. North American sales fell 20 percent to $556 million, while comps fell 20 percent. Sales in the quarter were helped by a $43 million contribution since May from Stuart Weitzman. Wall Street was expecting 29 cents for the quarter and $973 million in sales for the quarter.
For the year, net income fell 48.5 percent to $402.4 million, or $1.45 a diluted share, on a net sales decline of 12.8 percent to $4.19 billion.
Shares of Coach rose 3.2 percent to $31.41 on the earnings beat.
Looking ahead, the company said the Coach brand’s operating margins for fiscal 2016 are estimated to be in the mid-to-high teens. For the year, transformation charges are around $50 million, and there are about $30 million in charges connected with the Weitzman acquisition, such as contingent payments. The Weitzman brand is estimated to contribute $335 million in sales. The two brands combined are expected to drive total revenue growth to high-single digits, the company said. Further, fiscal 2016 will include an extra week, with the 53rd week expected to contribute $75 million to $80 million in incremental revenue and 6 cents in diluted EPS.
Still, there’s that pesky category malaise that Coach has to work through.
Channel checks from different research firms have inconsistent results, with one having competitor Michael Kors as the preferred brand over Coach, while another saying that consumers haven’t noticed the change in the merchandise at Coach, even though the company said creative director Stuart Vevers’ product line has been in stores for nearly a year.
Luis doesn’t seem fazed by the conflicting findings, noting that internal metrics — from the transformed stores and its own focus groups — are what’s important to him and his team. That said, Coach saw handbag sales in the U.S. from the March quarter grow in the mid-single digits, while in June sales slowed to the low-single digits. According to Luis, “It’s hard to say whether the slowdown [reflects] a drop in total business for the larger brands [or] from our own decision to reduce [promotional events].”
The mixed bag of sales data from overseas owing to currency wars isn’t helping Coach. The company saw international sales fall 5 percent for the quarter to $392 million. On a constant currency basis, sales actually rose 3 percent for the period, in part due to purchases from tourists heading to Europe from Asia to take advantage of the depreciation of the euro. They were also buying in Japan because of the depreciating yen. With tourists heading elsewhere, that has meant fewer sales in the U.S. due to the appreciation of the dollar. And even in China, sales were higher on the Mainland, and slower in Hong Kong and Macau.
Pushing ahead on its own plans, Coach for the first time will have its own full runway show in September.
Jefferies’ Randal J. Konik on Tuesday maintained his “hold” rating on the stock, noting that “we look for stabilization in Coach’s core North American women’s handbag business to give us confidence that the story has inflected.” He said transformation efforts are viewed positively, given the “outperformance of remodeled stores.” Those stores are showing positive comps.