Coach profit boosted by sales, margins a concern

CHICAGO Tue Aug 2, 2011 9:20am EDT

An American flag flies at a Coach Inc. full-price store in Los Angeles, California July 29, 2008 REUTERS/Fred Prouser

An American flag flies at a Coach Inc. full-price store in Los Angeles, California July 29, 2008

Credit: Reuters/Fred Prouser

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CHICAGO (Reuters) - Upscale handbag maker Coach Inc (COH.N) saw margins decline in its fourth quarter, hurt by higher labor costs, sending its shares down in premarket trading on Tuesday, despite earnings that beat analyst expectations.

Sales increases in China as well as North America, where the retailer is expanding its outlet store and men's business, helped offset the impact of higher labor costs and a slowdown in Japan that resulted from the March 11 earthquake and the tsunami and nuclear disaster that followed.

Slipping margins are a concern for some analysts, as Coach's stock had outperformed the broader market and was vulnerable to a sell off.

Coach is an example of a retailer "priced to perfection," according to Wall Street Strategies analyst Brian Sozzi, who noted that gross margin fell to 71.8 percent from 73.3 percent a year earlier.

"That leaves a bad taste in your mouth," Sozzi said.

Shares of New York-based Coach have risen 18 percent since the beginning of the year, while the S&P 500 index has climbed just 2.3 percent.

Coach has been trying to hold the level on rising costs for labor in China by moving new production to lower-cost countries such as Vietnam and India.

"We don't expect to see any additional pressure on margins" in fiscal year 2012, Chief Executive Lew Frankfort said in an interview.

Unlike many luxury manufacturers and retailers, Coach has products that are also offered at more moderate prices, leaving it vulnerable to economic pressures on middle-income consumers.

But a recent survey of U.S. customers showed that more than two-thirds expect to buy a new Coach product in the next 12 months, the highest level since the recession hit, Frankfort said.

Also, the company is seeing more purchases of its pricier handbags that cost more than $400, he said.

"It says we do have some pricing power," Frankfort said.

Coach earned $202.5 million, or 68 cents a share, in the fourth quarter that ended July 2, up from $195.5 million, or 64 cents a share, a year earlier. Analysts on average forecast 65 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 8.5 percent to $1.03 billion, topping analysts' average forecast of $1.01 billion.

The 2011 fourth quarter included 13 weeks, compared with 14 weeks in 2010, which hurt comparisons.

Sales at North American stores open at least a year rose 10.1 percent, excluding the extra week in 2010.

Operating margin fell to 30.3 percent from 31.2 percent a year earlier. Coach's margins have been hurt by higher costs.

For fiscal year 2012, Coach said it was confident it could increase sales and earnings per share by double digits on a percentage basis.

Coach's shares fell to $63.58 in premarket trading, down from Monday's closing price of $65.29 on the New York Stock Exchange.

(Reporting by Brad Dorfman; Editing by Lisa Von Ahn and Maureen Bavdek)

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