Coach Inc. is still suffering from stagnation, especially in North America.
But Victor Luis, chief executive officer, contended in a telephone interview that third-quarter results, including the declines in North American sales, were “very much within our plan,” which he added had been communicated to everyone previously. Declines in North America included the reduced cadence of eOutlet events, as well as Coach-specific promotional events.
Investors, who had been hoping for better news on the turnaround front, sent Coach shares down 6.3 percent to close at $39.65 in Big Board trading. Nearly 16.9 million shares changed hands, compared with a three-month average of just 4.2 million.
The handbag maker said net income for the three months ended March 28 fell 53.8 percent to $88.1 million, or 32 cents a diluted share, from $190.7 million, or 68 cents, a year ago. Excluding brand transformation costs of $23 million, which included renovation charges and lease terminations for certain locations, net income would have been $100 million, or 36 cents a diluted share.
Net revenues decreased 15.5 percent to $929.3 million from $1.1 billion. In North America, sales declined 24 percent to $493 million, while direct sales fell 23 percent and comparable stores decreased 23 percent. Sales in department stores fell 30 percent. All channels reflected the reduction of the company’s eOutlet events, while sales in department stores also reflected a decline in shipments to the channel. International sales slipped 3 percent to $428 million, although they grew 4 percent on a constant currency basis.
For the nine months, net income fell 44.7 percent to $390.7 million, or $1.41 a diluted share, on a net sales decline of 13.1 percent to $3.19 billion.
Jefferies analyst Randal J. Konik noted that a “challenged North American women’s business reflects continued share loss in the domestic handbag market, and we look for stabilization in this part of the business as the key barometer of recovery to give us confidence that the story has inflected.”
For most investors and Wall Street analysts, results in the second quarter ended Jan. 29 were seen as a potential turning point for the struggling company, but given the third-quarter results, the fear is that the turnaround could take longer than expected. The concern comes even though diluted EPS beat Wall Street’s consensus estimate by 1 cent, since the company, which saw third-quarter net sales at $929.3 million, also fell short on volume expectations of $949.9 million.
Wells Fargo Securities analyst Paul Lejuez said while the quarter was “essentially in line with consensus and management expectations, results were weak and below by side expectations,” mostly due to deceleration in comps. “And while gross margin improved, gross profit dollars declined more than the last quarter. We continue to believe it will be difficult for Coach to execute its transformation strategy,” he said.
Jefferies’ Konik noted that the early reads on “transformed stores are positive, but the broader business remains challenged. As a result, we prefer to take a ‘wait and see’ approach.”
In the telephone interview, Luis said the new concept store model, whether newly opened stores or those undergoing renovation, “are doing much better” than the rest of the fleet.
At the end of the third quarter, there were 40 stores showcasing the new concept design, and another 14 stores were added in the quarter-to-date. The store sites showcasing the new architectural design are in North America and overseas. According to Luis, 104 more renovations are slated over the next two months, bringing the total number of sites renovated to 150 by the end of the current fiscal year. Two weeks ago, the company opened its first modern luxury outlet store, which was in Savannah, Ga.
For the fourth quarter, the company will continue with its store remodeling and opening schedule. It will also begin integrating the Stuart Weitzman brand, the purchase of which is expected to close in the next two weeks.
The company said in January it was acquiring the Weitzman brand from private equity firm Sycamore Partners for $574 million.
“Our shoe business through our licensee is $200 million, and the Stuart Weitzman business is over $300 million. Combined, we will occupy the number-two position in market share just below Uggs, making us a true player in the sector,” Luis said in January.
Luis on Tuesday reaffirmed that the two brands — Coach and Stuart Weitzman — would be developed and operated separately, although the team at Coach would help Weitzman in building its handbag line, while Weitzman executives would help their Coach counterparts build its footwear business. Coach renewed its footwear license with Jimlar for two years to enable it to build its infrastructure systems before bringing the operation in-house.
With its first acquisition not yet under its belt, Luis isn’t even considering the possibility of another deal down the road, noting that the company is focused on beginning the integration process and working with the footwear brand’s management team.
Meanwhile, the company introduced three lines by executive creative director Stuart Vevers in the quarter designed solely for its outlet stores. The lines are separate from the one that’s produced for the brand’s full-price luxury concept stores.