Soft North American Sales Culprit in Coach’s Profits and Sales Miss

Andrew Klips  |

Luxury accessory maker Coach, Inc. (COH) said Wednesday that sales and profits slumped in its fiscal second quarter as consumers in North America bought fewer of their items while freshly-minted CEO Victor Luis tries to right the company’s ship with departing CEO Lew Frankfort moving to executive chairman.

For the quarter ended December 28, 2013, the New York-based maker of handbags, wallets, sunglasses and more reported revenue of $1.42 billion, down by 6 percent from $1.50 billion in the year prior quarter. Net income for the quarter totaled $297.44 million, or $1.06 per share, compared to $352.76 million, or $1.23 per share, in Q2 a year earlier.

Wall Street was expecting earnings per share of $1.11 on sales of $1.48 billion.

In North America, total sales dropped by 9 percent to $983 million. Direct sales sunk 8 percent and comparable store sales, a key measure of growth, were lower by 13.6 percent. Victor Luis, who was tapped last year to take the CEO spot at the start of 2014 against the backdrop of an outgoing chief operating officer and North American group president at Coach, blamed the decline on weakness in sales of women’s bags and accessories. The losses in those areas more than offset growth in men’s footwear.

International sales were a bright spot, rising 2 percent to $425 million, paced by a nearly 25 percent rise in sales in China, keeping Coach on track to meet its annual guidance of $530 million in sales in the country. In Japan, dollar sales were down 21 percent on a weaker yen, translating to a decline of 2 percent on a constant currency basis.

On a constant currency basis, total international sales jumped about 11 percent.

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“We continued to be disappointed by our performance in North America, which was impacted by substantially lower traffic in our stores and by our decision to limit access to our e-factory flash sales site,” commented Luis in a statement this morning. “At the same time, China results remained resilient with total sales growing about 25% and comparable store sales rising at a double digit rate,” he added.

Most key metrics moved the wrong way for Coach last quarter compared to a year earlier. Operating income slumped to $436 million from $527 million. Operating margin subsequently contracted from 35.0 percent to 30.7 percent. Gross profits were down from $1.09 billion to $983 million. Gross margin slid to 69.2 percent from 72.2 percent. Selling, General, and Administration costs as a percentage of net sales rose to 38.5 percent from 37.2 percent.

The company repurchased and retired about 3.3 million shares during the quarter for an aggregate amount of $175 million (average of $52.99 per share). Coach re-bought $175 million of its common stock in the first quarter as well and still has $1.0 billion left authorized under the current repurchase plan.

Coach may be excited about launching the first collection under new Executive Creative Director Stuart Vevers in September, but investors aren’t feeling it in Wednesday trading action. The disappointing earnings have knocked shares down by almost 7 percent to $48.89, bringing losses in the past seven trading days to nearly 13 percent.

With the lack of economic data on tap this week (only initial jobless claims and existing home sales on Thursday), traders are focused on earnings reports this week, which have been lackluster. International Business Machines (IBM) also let investors down with a report today showing that revenue fell for the seventh straight quarter.

The markets have risen high on speculation that improving economic conditions would manifest into better earnings, but that is not necessarily showing to be the case so far in reports from how 2013 concluded.

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