Coach Inc. expects conditions at retail to improve later this year, but the company’s chief executive warned Tuesday that the “new normal” will hardly be easy.
“I don’t believe conditions will ever return to what they were before the recession,” said Lew Frankfort, chairman and chief executive officer, in an interview following the company’s disclosure of a 29.3 percent drop in third-quarter earnings on a less than 1 percent decline sales. He said a “new normal” is ahead, “where consumers will be saving more, being extremely judicious in their spending.”
Comparable-store sales have stabilized at Coach’s North American stores to pre-holiday levels, but the accessories maker is continuing to modify its pricing paradigm to better cater to a consumer still wary of purchasing.
“The reality is that the consumer continues to be enormously cautious,” Frankfort said. “As soon as we see some signs that the banks are stabilizing, and the equity markets as well, consumers will feel relieved that they will no longer be in danger of losing the rest of their wealth. They’ll begin to make some purchases.”
The reasonably upbeat outlook and the introduction of a 7.5-cent-a-share quarterly dividend helped propel Coach shares up $2.69, or 14.8 percent, to close at $20.92 on Tuesday, on volume that was more than three times the average.
To “emerge stronger from the recession” and more focused on the post-downturn consumer, Frankfort said the company is balancing its assortments by price and introducing new collections with more handbag stockkeeping units in the $200 to $300 price range. Handbags represent 55 percent of overall sales, Frankfort said.
For the next quarter or two, sales may decline on a year-over-year basis as the firm introduces new collections in which 50 percent of the offering is in the updated price range. However, over time the plan is to improve the conversion rate of consumers visiting the stores and increase the average ticket price, the ceo noted.
For the three months ended March 28, income fell to $114.9 million, or 36 cents a diluted share, from $162.4 million, or 46 cents, in the year-ago quarter. Sales dipped 0.6 percent to $740 million from $744.5 million, while North American comps fell 4.2 percent. Direct-to-consumer sales rose 9 percent to $634 million, while indirect sales dropped 35 percent to $106 million because of reduced shipments to department stores. The company also said its factory stores had “solid increases in traffic and conversion” when promotions were held.
To improve gross margins, the firm is working on lowering manufacturing costs as well as improve the sourcing of raw materials. Frankfort said he expects gross margins to stabilize at the 70 to 72 percent level for the current fiscal fourth quarter and the periods ahead. In the third quarter, gross margin fell to 71 percent of sales from 75 percent in the year-ago quarter.
For the nine months, income dropped 16.1 percent to $477.6 million, or $1.46 a diluted share, from $569.5 million, or $1.56, last year. Sales rose 2.2 percent to $2.45 billion from $2.40 billion.
Speaking of the introduction of a dividend, payable June 28 to shareholders of record June 8, Frankfort said Coach chose to do it now to “send a strong signal to investors regarding our confidence in our outlook and our strength about our balance sheet and cash flow generation in a period of great economic uncertainty.”
In the quarter, the company, which has virtually no debt, completed the purchase of all of its Mainland China retail locations. Frankfort said it had double-digit sales growth in Hong Kong and Mainland China because the company’s price points are 40 to 50 percent lower than its European competitors.