Shares of Coach Inc. fell more than 5 percent Wednesday after its second-quarter North American comparable-store sales improved but fell below analysts’ expectations even as overall sales and profits posted double-digit gains.
This story first appeared in the January 21, 2010 issue of WWD. Subscribe Today.
For the three months ended Dec. 26, income rose 11.1 percent to $241 million, or 75 cents a diluted share, from $217 million, or 67 cents, in the year-ago quarter. Sales gained 10.9 percent to $1.07 billion from $960.3 million. North American comps rose 3.2 percent, the first positive comp in more than a year, but below the 5 percent gain expected by Wall Street analysts.
Direct-to-consumer sales rose 14 percent to $934 million, while wholesale revenues fell 8 percent to $131 million, due mostly to reduced shipments to U.S. department stores.
Chairman and chief executive officer Lew Frankfort told Wall Street analysts on a conference call, “Our performance very clearly demonstrates the traction of the product and pricing strategies we’ve put into place and bodes well for future growth.”
For the six months, net income rose 5.3 percent to $381.8 million, or $1.19 a diluted share, from $362.7 million, or $1.10, in the year-ago period. Sales were up 6.6 percent to $1.83 billion from $1.71 billion. The handbag and accessories firm plans to expand further in Asia in the second half of fiscal year 2010, particularly in China, said Frankfort. He told analysts the firm posted “very strong sales growth and significant double-digit comps in China.”
In a research note in which he maintained his “hold” rating on the stock, Lazard Capital Markets analyst Todd Slater wrote, “The bulls will point to the first positive comp in four quarters, but the bears should note that the company hit the low end or missed comp expectations for the third consecutive quarter,” Slater wrote, adding that “the company used more coupons and discounts to a wider audience than last year in order to generate a worse-than-projected comp.”
On Wednesday, the bears carried the day and Coach’s shares fell $2.10, or 5.6 percent, to $35.35.
While noting gross margin improved 30 basis points, to 72.4 percent of sales, Slater pointed out the pickup was offset by a 90 basis point increase in selling, general and administrative expenses, just as the positive effect of sourcing improvements was muted by higher markdowns.
In a telephone interview, Frankfort told WWD the company’s polling suggests the Coach customer remains “modestly pessimistic” about the economy, but better than a year ago. Those identifying themselves as pessimistic declined to 58 percent versus 85 percent a year ago, the ceo said.
Frankfort said the rebalancing of the assortment and the lowering of the average price point by 15 percent to restore the so-called “sweet spot” has also encouraged consumers to purchase Coach at greater levels. “We saw improved conversions when they visited the stores. They are buying at a higher rate than last year,” the ceo said, adding he remains optimistic for the second half of the fiscal year.
The ceo said the new namesake line by Reed Krakoff, Coach’s president and executive creative director, is set to launch in August. “Reed has expanded his bandwidth to adequately cover both brands by strengthening the team under him within the Coach brand, and by bringing in a team of seasoned designers” for his own line, Frankfort said.
He also explained the line will target the “white space between Coach and the European luxury brands in the $600 to $1,000 arena, with Coach [taking on the] more populist approach.”