Coach beats, shares slip on growth concerns

NEW YORK (Reuters) - Leather goods maker Coach Inc (COH.N) said shopper traffic to its full-line stores slowed during the fourth quarter, raising concerns about its sales growth and sending shares down almost 4 percent.

While Chief Executive Lew Frankfort said on a call that far more of the shoppers who did step into Coach stores made purchases, helping to boost sales, the lower traffic trend raised concerns on Wall Street about Coach's ability to meet its sales targets.

"You don't want to hear them say that traffic is falling, especially at the start of the fall season," said Brian Sozzi, an analyst with Wall Street Strategies.

Frankfort's remarks overshadowed better-than-expected fourth-quarter results, boosted by strong demand for its less expensive Poppy handbag line and rapid growth in China.

In an earlier statement, Frankfort said he was confident Coach's sales and profits could continue to rise at a double-digit pace, aided by expansion in places such as Western Europe and China, where Coach is just entering the market.

But that expansion, coupled with higher leather costs, could eat away at Coach's profit margins, Sozzi said.

"They basically told the market they won't be able to beat year-over-year comparisons," he said.

Coach also reported shipments in its wholesale business to U.S. department stores were flat during the quarter, compared with a year earlier. But Frankfort told Reuters it was better to risk losing sales than start the discounting many department stores were engaging in.

"We have been reluctant to be promotional," he said in an interview.

OUTLETS, MEN AND CHINA HELP

Net income for the fourth quarter, which ended July 3, rose 34.1 percent to $195.5 million, or 64 cents per share, from $145.8 million, or 45 cents per share, a year earlier. The earnings beat Wall Street forecasts of 56 cents per share, according to Thomson Reuters I/B/E/S.

Coach said sales rose to $950.5 million in its fourth quarter, while analysts had forecast sales of $888.87 million. The period included an extra week, without which Coach said sales would have been up 13 percent, and earnings per share would have been 23 percent higher at about 56 cents.

Sales at North American stores open at least a year rose 6.3 percent during the quarter.

Frankfort said that a strategy to entice shoppers with an extensive line of entry-priced products and to expand its outlets had driven sales in North America, which makes up the bulk of the business.

While China now accounts for about 3 percent of Coach's sales, Frankfort said that by mid-decade, that could rise to 10 percent, or about $500 million.

"It (China) has the opportunity within a few years to play a much more significant role," Frankfort told Reuters.

For the fiscal year that just ended, retail sales in China doubled. Coach has 41 stores in China as of July 3, and has plans to open another 30 locations there this fiscal year.

Coach also plans to build up its men's business, particularly in Japan and the United States. Sales to men account for about 4 percent of overall sales and could reach 10 percent within a few years, Frankfort said.

Coach's gross margins rose 2.9 percentage points to 73.3 percent, partly due to lower leather prices. Frankfort said he expects the costs of raw materials to edge higher this year.

Coach operates 342 retail stores and 121 factory outlets in North America.

In early afternoon on the New York Stock Exchange, Coach shares were down 3.8 percent at $36.98.

(Reporting by Phil Wahba, editing by Michele Gershberg, Maureen Bavdek and Gunna Dickson)