Shares of Coach Inc. rose 4.4 percent after the company posted first-quarter results that bested Wall Street’s expectations.
For the quarter ended Sept. 26, Coach said net income fell 19.1 percent to $96.4 million, or 35 cents a diluted share, from $119.1 million, or 43 cents, a year ago. On a non-GAAP basis, net income was $113 million, or 41 cents. Net sales dipped 0.8 percent to $1.03 billion from $1.04 billion a year ago, but rose 3 percent on a constant currency basis.
Wall Street was expecting earnings per share of 40 cents, on an adjusted basis, on net sales of $1.04 billion. The one-cent beat on EPS, and the beat on adjusted sales, sent shares up to close at $31.65 in Big Board trading. Nearly 10.4 million shares changed hands, compared with a three-month average trading volume of 4.2 million.
Whether an early green shoot is something to cheer about remains to be seen. On the sales front, North America was still a problem area for the core Coach brand. North American sales fell 11 percent to $561 million, or down 10 percent on a constant currency basis. The company noted that the decline still represented sequential improvement. North American direct sales fell 12 percent on a dollar basis and down 11 percent on a constant currency basis, while comparable-store sales fell 9.5 percent, which included the impact of Internet sales reflecting a reduction in eOutlet events.
On the international front, sales fell 3 percent to $369 million, but rose 6 percent on a constant currency basis. Total China sales rose 2 percent in dollars and were up 3 percent in constant currency, with double-digit growth and positive comps on the Mainland offsetting continued weakness in Hong Kong and Macau. In Japan, sales fell 10 percent in dollars due to the weaker yen, but rose 6 percent on a constant currency basis. The company said sales in Europe remained “very strong.”
The company said net sales for the Stuart Weitzman brand were $87.5 million for the quarter. The company posted a charge of $13 million, primarily for organization efficiency costs and accelerated depreciation for store renovations, as well as $11 for costs connection with the acquisition of the brand.
The company is expected to post positive comparable-store sales for North America in the fourth quarter of fiscal year 2016, while sequential improvement is expected to continue as well.
A year ago, the company fell short at holiday with gift products under $100 at its outlet store. In an interview, Victor Luis, chief executive officer, said that problem has been resolved, with the company making a bigger investment this year to ensure sufficient stock for the channel.
In spite of global turbulence in the handbag category, currency fluctuations and macro-economic gyrations, Luis said the company is “headed into holiday with a good level of optimism.”
The company is relocating its Regent Street flagship store in the U.K., and has secured adjacent retail spaces that will have both the core Coach brand and the Stuart Weitzman brand next to each other, Luis said. While that’s how the retail square footage worked out in that location, that’s not the typical retail plan for the two brands, the ceo said. He emphasized that the two brands are operating independently of each other, with independent locations. Separately, Luis said the company is targeting $125 million in sales for its European business for fiscal year 2016.
Luis also noted that so far the trend toward smaller handbags is continuing, with the smaller bag and cross-body style having a “higher penetration in our business in Asia.” He explained that Asia has a higher commuter lifestyle, whereas in the U.S., the shoulder bag seems to be the preferred style of choice. The preference is still less logo and more leather, which Luis said “bodes well for us.”
The company’s 75th anniversary — it was started in 1941 — will be celebrated with styles inspired by the original tanned leather collection, but modernized for today’s functionality needs. The first two styles to be updated will be the Saddle Bag and the small Dinky cross-body bag, the ceo said.
Andre Cohen, president North America, said the momentum the company saw in the first quarter has continued into October. He also saw growth in the handbag category that sells for $300 and below, but was quick to point out that is not the brand’s sweet spot for price points. Cohen explained: “The average price point continues to grow through brand elevation….We want to be a strong player in the $300 and below price bracket, which we missed last year and is something we addressed this year. It is important for us to be a player in that space, but that is not the sweet spot for Coach.”