NEW YORK — In the rough waters of retailing, Coach Inc. continues to enjoy smooth sailing in both the U.S. and Japan.

This story first appeared in the January 22, 2004 issue of WWD. Subscribe Today.

Reflecting higher sales and improving margins, the New York-based maker of American classic accessories said Wednesday that in its second quarter ended Dec. 27 profits surged 52.9 percent to $95.4 million, or 50 cents a diluted share, a penny ahead of the guidance it raised earlier this month, as reported, as well as most recent analysts’ expectations. In last year’s quarter, the firm reported earnings of $62.4 million, or 34 cents.

Sales for the three months improved 33.4 percent to $411.5 million from $308.5 million. Top-line growth was fueled by strength across all of Coach’s distribution channels. Direct-to-consumer sales at Coach’s 165 retail stores and 77 factory stores increased 23.8 percent to $237.1 million from $191.5 million last year. Comparable-store sales rose 13.7 percent, with retail stores up 16.4 percent and factory stores sales up 9.4 percent. Indirect or wholesale volume rose 48.9 percent to $174.4 million from $117.1 million, as all businesses, including Coach Japan, business-to-business, international wholesale and U.S. department stores, contributed.

“Over the past few years, the wind has clearly been at our back,” Lew Frankfort, chairman and chief executive, said on a morning conference call. “We have experienced exceptionally strong comparable-store sales gains in U.S. retail stores and double-digit same-location sales in Japan.”

Reflecting impressive holiday business, Coach boosted its second-quarter guidance earlier this month to at least 48 cents, above its previous guidance of 44 cents.

Perhaps because expectations were high, Coach’s stock failed to light up the Big Board Wednesday. Shares, which split 2-for-1 on Oct. 1, dropped 25 cents, or 0.7 percent, to close at $35.70 on the New York Stock Exchange.

He noted the strong sales combined with distribution growth — both through new and expanded stores — led to a near doubling of its sales since the end of calendar year 2000.

Frankfort said on the call the strength at U.S. retail reflects increases in traffic and average transaction size, the latter boost of 8 percent driven by broader price points and its tiered merchandise strategy. However, those two factors were offset by a modest conversion rate, attributable to double-digit increases in traffic.

Other hot spots were U.S. department stores, with point-of-sale sales up nearly 25 percent, and Japan, where Coach has 99 stores and overall sales skyrocketed 70 percent in U.S. dollars and 50 percent in yen.

“While I have said handbags and women’s small leather goods continue to drive the business, these results are generated from a broad platform of accessories that target our very diversified consumer base,” Frankfort said.

The Soho collection, especially the Soho Duffle, was a smash hit for holiday, as were occasion bags and accessories, Frankfort said. He also noted Coach piloted a resort package in December, which represented 18 percent of sales in 20 Coach stores. Next year, he said Coach plans to introduce a resort presentation in all U.S. retail stores and in all warm weather and flagship department store locations.

The holiday momentum has continued into January, with Coach experiencing strong response to new styles and colors in the Soho collection and in updated spring accessories. Next week, Coach will unveil a new interpretation of the Hamptons carryall in pastel suedes trimmed with patent leather, as well as the patent gallery tote in spring colors. In March, Coach will bring back an expanded Hamptons Weekend and Soho Twill offering to broaden its appeal in the casual, weekend market.

While analysts question how long Coach can sustain the stellar results it has achieved over the past three years — first-quarter profits rose 88.3 percent — Frankfort contended Coach “will continue to enjoy further market-share gains over our planning horizon through store growth in our retail business in the U.S. and Japan and increased productivity, driving double-digit topline growth.” In addition, he said he expects further operating margin improvement, which would enable earnings growth to outpace sales gains.

Coach now estimates fiscal 2004 earnings of at least $1.20, up 50 percent from last year and above analysts’ current consensus estimates of $1.15. Sales are expected to grow at least 33 percent to $1.26 billion. For the current second half, earnings are anticipated to reach at least 48 cents a share, above consensus estimates of 44 cents, and second-half sales are pegged at least $595 million, with third-quarter sales of at least $290 million and the fourth quarter’s at $305 million. In addition, it is targeting at least a 19 percent increase in U.S. comps in each quarter and continued double-digit comp growth in Japan.

Michael Devine, chief financial officer, said on the call, “The profitable dynamics remain intact. We believe and are confident we still have room to grow our operating margin by an additional 100 basis points per year.”

For the first half, earnings jumped 62.2 percent to $137.8 million, or 72 cents a diluted share, from $84.9 million, or 46 cents. Sales for the six months rose 33.6 percent to $669.9 million from $501.3 million.