Coach Inc.’s efforts to elevate the brand and focus on quality distribution are gaining strength following the firm’s report of double-digit earnings growth for the first quarter.
Shares of Coach closed up 2.2 percent to $36.68 in Big Board trading Tuesday.
For the three months ended Oct. 1, net income increased 21.8 percent to $117.4 million, or 42 cents a diluted share, from $96.4 million, or 35 cents, a year ago. Net sales were up 0.7 percent to $1.04 billion from $1.03 billion. Wall Street’s consensus estimate was 45 cents on sales of $1.07 billion.
Gross profit for the quarter was $715 million, up 3 percent compared with last year. SG&A expenses were $549 million, down 1 percent, while operating income was $166 million, up 17 percent.
The company said North American sales for the Coach brand fell 3 percent to $545 million, although comps at bricks-and-mortar stores — full-price and factory stores — rose 4 percent for the quarter. Aggregate North American comps sales rose 2 percent, including the negative impact of e-commerce driven by a further decline in the firm’s eOutlet flash sale business. Internationally, the Coach brand saw sales gain 7 percent to $395 million.
In a conference call with Wall Street analysts, Victor Luis, chief executive officer, said, “We remain focused on elevating the Coach brand through compelling product, differentiated store environments and emotional marketing. At the same time, we implemented the strategic actions necessary to reposition the brand and streamline our distribution in the promotional North American department store channel.”
In a telephone interview, Luis said the company is “constantly managing the brand as one brand. We know certain channels are more promotional than others.”
The company has been pulling back on promotions and in distribution channels that no longer make sense, such as at its e-outlet flash-sale format, and the plan to close 250 underperforming department store doors by next spring. Luis said having fewer promotional products available helps to “maintain trust with the consumer and not create confusion across channels.” For example, its elevated Coach 1941 runway collection is available at the company’s stores and at finer department stores. But there are also other Coach products that comprise the bulk of what’s sold in the department store channel, merchandise that Luis describes as “fashionable, but not at price points that are as high where the fashion is more easily understood.”
Andre Cohen, president for North America and global marketing, said during the interview that the company’s goal is to work with the department store channel on more brand-building and on reducing the number of promotions, which in turn reduces markdown allowances. The revenue decline in the quarter was due to the firm’s planned reduction in sales in the department store channel, because, Cohen said, “We see the business stabilizing there.”
The company has been “very focused on increasing distribution in department stores at the Tier 1. We are now in six Neiman Marcus doors and [at their] online site, the first ever for Coach,” he added.
Luis said the focus on the finer specialty department store doors both here in the U.S. and globally is an important part of the company’s strategy. Although the price points are higher for the collection pieces, with some over $1,000, the ceo said the vast majority of the product offerings are in the $300 to $800 range.
At the same time, the company is also fine-tuning its factory outlet store business, which consists of surplus merchandise from the full-price stores after the season has ended and product specially created for the channel that either is unique for the outlets or was “inspired” by an offering at full-price, but not identical to anything sold at its full-price stores, Luis said.
The ceo said mainland China remains an opportunity for the company, where “we believe there’s tremendous growth potential to drive sales within the current network and drive distribution growth on the Mainland. Outside of China, in Southeast Asia, there’s growth opportunity in Thailand, Indonesia and Australia.” Luis described Southeast Asia as “still very much in the nascent stage. There we work with our distribution partners.” As for Europe, he said that, too, is still in the early stage of growth.
For the Stuart Weitzman brand, net sales were $88 million for the quarter. The company continues to drive global awareness and brand relevance as it gains traction with Millennial consumers. The company has a “very strong tradition and core strength in boots. In addition, the over-the-knee trend continues. We are seeing strength in booties,” Luis added.
While the topic of mergers and acquisitions comes up often — whether it’s market rumblings on what Coach might acquire next or rumors among traders about Coach merging or being taken over by another firm — Luis didn’t give the impression that the group would want to be anything other than a stand-alone firm. He said the criteria for Coach on what it wants to acquire hasn’t changed. That criteria requires its next target to be a great brand and one where Coach can leverage its global infrastructure — think global supply chain — and the skill set of its management team to “add value to our business,” Luis said.
The company reiterated the fiscal 2017 outlook it provided in August, noting that it continues to expect revenues to increase by low-to-midsingle digits. It expects double-digit growth in both net income and earnings per diluted share for the year.