NEW YORK — Coach Inc. is focused on growing the halo around the Coach brand as it also eyes potential acquisitions.
The company is pulling back on its distribution to the department store channel, about 25 percent of its North American locations, a move that will help the accessories firm keep the consumer focused on its modern luxury concept globally and at full price.
“For the guidance that we have given for the upcoming year, that will impact 1 percent of total sales growth, or $40 million to $50 million,” said Victor Luis, chief executive officer of Coach, in a telephone interview.
Earlier in the day, the company posted fourth-quarter results in which earnings per share beat Wall Street’s estimate by 4 cents, even though the firm did slightly miss the consensus estimate for revenues in the period. Also significant was the 2 percent growth in comparable-store sales, the first time comps have increased since the third quarter of 2013, suggesting the turnaround story at the company has been taking hold.
Still, investors sent shares of Coach down 2.2 percent to close at $40.52 in Big Board trading Tuesday. More than 10.1 million shares changed hands, compared with a three-month average trading volume of 3.7 million shares. Some of the trading can be attributed to shorting of the stock, as well as investor reaction to the company’s perceived lackluster guidance for fiscal 2017.
For the three months ended July 2, net income was $81.5 million, or 29 cents a diluted share, versus net income of $11.7 million, or 4 cents, a year ago. On an adjusted basis, net income was $126 million, or 45 cents a diluted share. Net sales rose 15 percent to $1.15 billion from $1 billion. Wall Street was expecting EPS of 41 cents on total revenues of $1.17 billion.
By segment, North American sales rose 9 percent to $606 million, which included $44 million due to an additional week of sales in the fiscal year. North American direct sales rose 10 percent. Comparable-store sales rose 2 percent in the quarter. The company said point-of-sales at North American department stores declined at a midteen rate compared with a year ago, while net sales into department stores decreased in the high-single digits. The company said that decline reflected the firm’s strategic actions in the channel.
International sales rose 15 percent to $450 million, which included $32 million due to the additional week of sales. Greater China sales were up 5 percent, offsetting continued weakness in Hong Kong and Macau. In Japan, sales rose 7 percent. Sales in Europe, a smaller component of overseas operations, grew at a double-digit pace.
For the year, net income rose 14.4 percent to $460.5 million on a 7.2 percent sales gain to $4.49 billion.
Luis described the year as an “inflection” period for the firm. “There’s still more work ahead of us. This is not about feeling hubris, not about arriving, but about the direction [we are headed] in which we feel good about.”
He noted that about 40 percent of sales are now in handbags above the $400 price tag: “Consumers are understanding the value of Stuart [Vever’s] designs,” the ceo said, referring to the firm’s creative director.
As for pulling back on distribution at the department store channel, the bane of the mass-market consumer base and what has traditionally been the bulk of Coach’s sales, Luis said the firm’s department store partners understood the strategy. “We have great belief in the department store channel and its importance….It’s not about where we are pulling back, but about adding more in the tier-one department stores and specialty stores,” he said.
Luis explained that the pullback also meant fewer dollars for markdown allowances, and in the stores that Coach will remain in, the brand will invest in renovating its shop-in-shops, adding shop managers and in marketing dollars.
The change is just for the Coach brand, and does not impact Stuart Weitzman, which isn’t as widely distributed. For the quarter, Coach said net sales at Weitzman were $84 million, representing an outpacing of the firm’s original projections.
Earlier in the day, the footwear brand indicated a major generational and strategic shift as it named Giovanni Morelli creative director, succeeding founder Stuart Weitzman on May 5, 2017, when Weitzman will take the reins as chairman. Morelli will report to Wendy Kahn, who is slated to become ceo and brand president on Sept. 13.
The accessories firm paid $575 million last year to acquire the luxury footwear company. Coach has said it’s keeping an eye out for other brands it might want to acquire, and Luis reiterated that it will do a deal only when it makes sense for the company.
The fact that Coach spent $575 million for Weitzman doesn’t mean it needs to do a deal just as big. “One doesn’t impact the other….Each acquisition has to stand on its own merits. Weitzman obviously was a terrific one for us, and it continues to be a growth story, which is what it was intended to be,” Luis said, noting the learnings the firm has acquired on the footwear front.
Luis said Coach has been looking at the potential of some “unique assets” in the firm’s core footwear, handbag and outerwear categories. And if Weitzman is any indication of what Coach might be looking for, the next deal would be for a unique brand, with a strong positioning where the franchise can be grown globally, Luis said. Coach prefers brands with a clean distribution footprint around the world.
Luis gave the impression that Coach isn’t in any rush when it comes to its next acquisition, nor does it seem there’s any pressure to get a deal done.
“I want to be clear about our investment strategy, and that is investments in our current business. We will be selective and very opportunistic on opportunities to make value accretive acquisitions. We will look to where we can as a company help drive value,” the ceo said, noting Coach’s proven experience in growing brands here and abroad.
“Our strategy is not to look for fixer-uppers. We are focused on brands that can drive growth for Coach Inc., with stable management teams and where there are opportunities to grow,” Luis emphasized.
For fiscal-year 2017, the company guided revenues on a non-GAAP basis to increase by low-to-midsingle digits, and initiated an operating margin forecast of between 18.5 percent to 19 percent for the year.