Coach Inc.’s fourth-quarter results had a few surprises: a beat of Wall Street’s consensus earnings per share estimate by 6 cents and a comps decline of 17 percent that was better than the 20.5 percent drop some expected.
This story first appeared in the August 6, 2014 issue of WWD. Subscribe Today.
That sent shares of the company up 4.3 percent to close at $35.80 in New York Stock Exchange trading.
For the three months ended June 28, net income fell 66 percent to $75.3 million, or 27 cents a diluted share, from $221.3 million, or 78 cents, a year ago. Net sales slid 6.6 percent to $1.14 billion from $1.22 billion.
On a non-GAAP basis, operating margin was 20.4 percent compared with 30.3 percent a year ago, while gross margin was 69.4 percent versus 73 percent a year ago.
The company was hurt by declines in its North American business, where sales fell 16 percent to $691 million from $825 million. Comps decreased 17 percent.
For the year, net income fell 24.5 percent to $781.3 million, or $2.79 a diluted share, on a 5.3 percent decline in net sales to $4.81 billion.
Among the milestones in the quarter: the company surpassed $500 million in sales in China and drove men’s to $700 million in sales globally.
Dig deeper and there are still reasons for concern, which Wall Street was quick to point out.
Wells Fargo’s Paul Lejuez noted that while the company beat slightly on the top line, “it effectively bought the comp, running an annual sale for several weeks in the fourth quarter,” with a large part of the assortment at 50 percent off. And while there was strength in footwear and handbags over $400, Lejuez noted that in spite of management’s optimism about its men’s business, the company “now expects [the category] to achieve $1 billion in sales one year later than previous expectations.”
Sterne Agee’s Ike Boruchow added that China, a key growth driver, might be decelerating. He noted that sales growth decelerated to 20 percent in the quarter, compared with 25 percent in the first through third quarters, and the fact that the company will open 10 new stores in fiscal-year 2015, compared with 25 to 30 annually over the past four years.
Jefferies’ Randal J. Konik pointed out that with fiscal-year 2015 focused on investments involving brand revival through product refreshes and store refreshing, “an inflection point on the business seems unlikely before fiscal year 2016.”
Citigroup’s Oliver Chen said there could be continued risks in new product designs and presentation, referring to creative director Stuart Vevers’ new collection hitting stores in September that is helping to transform Coach to a lifestyle brand.
In a telephone interview, Victor Luis, chief executive officer, said the new Vevers collection will be available in all Coach stores on a global basis starting in mid-September, with store renovations in about 15 to 16 locations prior to holiday. About 60 new doors will open with the updated store format, and 150 doors globally will be refreshed in the new fiscal year.
Vevers will also be designing a new outlet product line for the company’s factory stores, but that won’t become available until the second half of fiscal year 2015.
Given Wall Street’s concern, and caution, over consumer receptivity to the new product line, Luis was asked if there is a Plan B in case the line didn’t resonate as expected. The ceo was frank about what the company needs to do: “At the end of the day, it’s not about one collection. It’s about transforming the brand. It’s not about one moment in time, but how can we obviously continue to iterate and evolve and drive impressions in the mind of the consumer.”
According to the ceo, the Vevers collection is the “halo” of the Coach brand, and if it needs to be adjusted, the company will learn what needs to be done, and repeat the process of testing styles as it continues to redefine itself.
Asked about the focus of Wall Street over gross margins, such as that of Coach’s competitor Michael Kors Holdings Ltd., Luis said Coach has achieved a non-GAAP gross margin rate of 69 percent at a “pretty consistent level.”
While executing on its initiatives to transform the Coach brand, the company is also keeping its eye on international and men’s.
Luis said the international markets continue to be an “important lever of growth.” He noted that China represents long-term growth prospects, while Europe is the white space where the company has room to expand.
The ceo also expects the men’s category will grow faster than women’s at a clip of 10 percent over the next five years, although that’s also reflective of how underdeveloped the market is currently.