UPDATE 5-Coach profit meets estimates, outlook falls short

Tue Jul 29, 2008 6:49pm EDT

(Adds more comments from analyst, CEO, details on LVMH)

By Martinne Geller

NEW YORK, July 29 (Reuters) - Coach Inc (COH.N) reported higher quarterly profit that met Wall Street estimates, helped by strength in Asia, but the weak economy at home led the handbag maker to give a full-year outlook that fell short.

"We've decided to plan cautiously until we see concrete evidence of a favorable shift in consumer spending," Coach Chief Executive Lew Frankfort said in an interview. "We believe the consumer malaise will continue well into 2009, and as such, we are extremely cautious in our outlook."

Coach forecast sales growing about 13 percent in fiscal 2009, which began in June, after growing 22 percent in 2008.

Coach shares closed down 1.4 percent, while the Standard & Poor's Retail Index .RLX closed up 4 percent.

Thomas Weisel Partners analyst Liz Dunn said some investors were prepared for a lower-than-expected outlook from Coach, whose stock has fallen nearly 14 percent this year through Monday's close as sales growth has slowed.

"The market is trying to digest whether or not this slowdown in growth is temporary or if it's more permanent," Dunn said. "And if it's more permanent, then it suggests the multiple contraction that we've seen will be more permanent as well."

Dunn said she expects Coach to grow more slowly in the future as it reaches a saturation point and the wider industry slows.

Coach's Frankfort said Coach's handbag sales rose 14 percent in the first half of calendar year 2008, outperforming the handbag industry, whose sales were up 5 percent to 10 percent. That would be down from the industry's prior growth rates in the 15 to 20 percent range.

STRENGTH ACROSS THE POND

French rival LVMH (LVMH.PA) also saw its sales of fashion and leather goods rise 14 percent on a like-for-like basis in the first half of the year.

The maker of Louis Vuitton handbags, which are generally much more expensive than the average Coach bag, posted better-than-expected operating profit, affirmed its full-year earnings target, and said "things should not get worse" on the economic front.

While the impact of rising gasoline and food prices, tighter credit and falling home values are hitting consumers "across the board", Dunn said LVMH could be in a slightly better position.

"I think the true luxury customer is a little bit less impacted by the current macro trends than the Coach customer," Dunn said, calling the average Coach customer an "accessible luxury customer," who is generally upper-middle-class, rather than very wealthy.

She said European luxury goods makers were being helped by European tourists taking advantage of the weak U.S. dollar and snapping up name brands on sale.

Coach's Frankfort said sales at Coach factory stores were helped by a surge in international tourists.

WEAK DOLLAR BOOST

Coach said net income for its fiscal fourth quarter, ended on June 28, rose 33 percent to $213.5 million, or 62 cents per share, from $160.6 million, or 42 cents per share, a year earlier.

Excluding items such as a favorable tax settlement, the company earned 50 cents per share, in line with analysts' average estimate, according to Reuters Estimates.

Net sales for the quarter rose 20 percent to $781.5 million, despite consumer pressures including soaring food and gasoline costs, declining home values and a credit card crisis.

Excluding the impact of the weak U.S. dollar, which inflates the value of sales from overseas, net sales rose 16 percent, helped by new store openings.

Frankfort said a greater number of shoppers made store purchases during the quarter but there was less store traffic and customers' average purchase declined slightly. He said new stores had better performance than expected.

Sales at North American stores open at least a year rose 6.7 percent.

The New York-based company said it expects 2009 sales of about $3.61 billion and earnings of at least $2.25 a share, including charges of 5 cents to 6 cents per share related to the acquisition of its retail business is China.

Analysts on average were expecting full-year earnings of $2.36 per share on revenue of $3.63 billion, according to Reuters Estimates.

For the current first quarter, Coach forecast earnings of 44 cents per share on sales of about $765 million, below analysts' average view, which called for earnings of 48 cents on revenue of $784.4 million.

Coach shares closed at $26.00 on the New York Stock Exchange. (Reporting by Martinne Geller; Editing by Lisa Von Ahn, Steve Orlofsky, Dave Zimmerman, Gunna Dickson)

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