Coach Misses Zacks' Expectations - Analyst Blog

By Zacks | January 23, 2013 AAA

Coach, Inc. (COH) posted lower-than-expected second-quarter fiscal 2013 results. The quarterly earnings of $1.23 per share fell short of the Zacks Consensus Estimate of $1.29 but rose from $1.18 earned in the prior-year quarter. The news was not welcomed by the market, as the shares of this Zacks Rank #3 (Hold) designer and marketer of fine accessories and gifts nosedived 15.6% or $9.48 to $51.20 during pre-market trading hours.

Management cited that the challenging macroeconomic conditions and intense promotional strategies undertaken by competitors in the women's handbag category muted the company's performance in North America. However, international results remained a bright spot in the quarter.

The New York-based Coach said that net sales for the quarter came in at $1,503.8 million, up 4% from the year-ago quarter but came below the Zacks Consensus Estimate of $1,605 million. On a constant currency basis, sales increased 5%.

Behind the Headline

Total North American sales inched up 1% to $1.08 billion. Direct-to-consumer sales increased 2% but comparable-store sales declined 2%. At POS, North American department stores sales remained marginally below compared with prior-year quarter, whereas shipments into department stores dropped.

International sales surged 12% year-over-year to $411 million. China business sustained its strong performance as sales soared about 40% with a double-digit rate increase in comparable-store sales. International wholesale shipments fell marginally, whereas sales trends across POS remain sturdy. Sales in Japan edged down 2%, excluding foreign currency translation, whereas in dollar terms, sales tumbled 7% from the year-ago quarter.

The rise in total sales was a positive indication for the luxury-goods market, battered by the recent economic upheaval. Coach's sustained focus on store sales productivity, merchandising, and marketing and strategic pricing have helped it remain afloat in a difficult consumer environment.

Going forward, the company remains optimistic about its unisex Legacy lifestyle collection, dedicated Men's stores and international growth opportunities to counter the soft consumer scenario. Management expects to attain more than $600 million in sales worldwide from its Men's business and at least $400 million in sales in China in fiscal 2013.

Gross profit jumped 4% to $1,085.4 million spurred by top-line growth; however, gross profit margin remained flat but robust at 72.2%. Adjusted operating income rose 1% to $526.6 million but operating margin contracted 100 basis points to 35%.

As a part of its strategy to directly control certain Asian markets, Coach is now directly operating domestic retail businesses in Singapore and Taiwan. The company also had acquired its Malaysian and Korean retail business.

Store Update

During the quarter, Coach opened 15 factory stores, including 4 Men's factory stores, and 2 retail stores, thereby taking the total to 189 factory stores and 356 retail stores in North America. In Japan, the company opened 5 net outlets bringing the total number of locations at 193.

In China, an addition of 13 new locations during the quarter took the total to 117. As a result of the acquisitions of retail businesses in Singapore, Taiwan, Malaysia and Korea, the company now operates 7, 27, 10 and 48 locations, respectively.

Other Financial Details

Coach, which competes with Ralph Lauren Corporation (RL), maintains a healthy balance sheet with a significant cash balance and a negligible debt load. The company also has been proactively managing its cash flows by making prudent capital investments and enhancing shareholders' return. The company's strong liquidity, positions it to drive future growth.

The company ended the quarter with cash, cash equivalents and short-term investments of $858.7 million and total long-term debt of $22.7 million with shareholders' equity of $2,082.3 million.

Coach also notified that it bought back approximately 4 million shares at a cost of $56.63 per share, aggregating $225 million during the quarter. At the end of the quarter, the company still has approximately $1.4 billion at its disposal under its share repurchase authorization.

Other Stocks Worth Considering

Other stocks worth considering in the textile, apparel, footwear industry are G-III Apparel Group, Ltd. (GIII) holding a Zacks Rank #1 (Strong Buy) and Hanesbrands Inc. (HBI) holding a Zacks Rank #2 (Buy). We expect both the stocks to continue with their upbeat performance.

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