Coach pays price for ditching coupons; shares slump

Tue Jul 31, 2012 5:12pm EDT

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(Reuters) - Leather goods maker Coach Inc (COH.N) suffered a sharp slowdown in quarterly sales growth after an ill-timed move to eliminate coupons at its lower-price outlet stores just as the U.S. economy weakened, consumers pulled back and rivals stepped up bargains.

The results drove Coach shares down nearly 19 percent, their worst single-day drop since just after the September 11 attacks on the World Trade Center and the Pentagon.

Sales at North American stores open at least a year rose 1.7 percent during the quarter that ended June 30, well below what Wall Street was expecting and the pace of preceding quarters.

The company said the slowdown at its outlets, its biggest source of revenue, accounted entirely for the sluggish numbers.

"An increasingly promotional environment in North America led to slower growth," Chief Executive Lew Frankfort told analysts on a call, noting that shoppers' appetite for coupons was "insatiable."

Much of Coach's trouble was self-inflicted. Coach incorrectly bet earlier this year that it could wean shoppers off the coupons that are part and parcel of the shopping experience at its outlet stores.

But after only a few weeks, Coach backtracked and brought back coupons, with an almost immediate improvement in business at outlets.

For all its image as a high-end brand, Coach's factory outlets, where it sells handbags and wallets for up to 50 percent less than at its stores, generate twice as much business as its full-service stores by some estimates.

That leaves Coach more exposed to a consumer pullback than are high-end companies like Saks Inc. SKS.N

"Americans are very tight with their dollars, especially the segment that looks at outlets," said Paul Swinand, an analyst at Morningstar.

Spending by American consumers fell in June for the first time in nearly a year, when accounting for inflation, the Commerce Department said on Tuesday.

Price-conscious shoppers have shown before that they will balk when stores stop giving discounts. Sales at mid-tier department store J.C. Penney Co Inc (JCP.N) plummeted after it stopped offering coupons this winter. Penney CEO Ron Johnson has likened coupons to drugs, but also found himself forced to backtrack on efforts to wean shoppers off discounts.

ECONOMIC VICTIMS?

Coach also saw the economy take a toll, as it has on consumer companies as diverse as Starbucks Corp (SBUX.O), Chipotle Mexican Grill Inc (CMG.N) and Tiffany & Co (TIF.N). All have warned in recent weeks that the U.S. consumer is under stress.

Coach expects North American same-store sales to be up by a low- to middle-single-digit percentage, compared with a 6.6 percent jump last year, and Frankfort warned of "a softening global macroeconomic outlook" and continued challenges in North America.

In the combined period of May and June, same-store sales at mid-tier chains like Macy's Inc (M.N) and Kohl's Corp (KSS.N) and discounter Target Corp (TGT.N) underperformed those at chains like Nordstrom Inc (JWN.N) and Saks.

"You are worried about the core middle-income U.S. consumer," said Brian Sozzi, chief equities analyst at NBG Productions.

The S&P Retail Index .RLX fell 1.75 percent on Tuesday while the broader S&P 500 .SPX .INX was down 0.4 percent.

Shares of Ralph Lauren Corp (RL.N), which like Coach also sells a lot of inexpensive wares, ended 1.9 percent lower at $144.34 on Tuesday. Ralph Lauren reports quarterly results next week.

The economy so far has not taken the same toll on all of Coach's "affordable luxury" competitors. Michael Kors Holdings Ltd (KORS.N) forecast in June that same-store sales would rise 35 percent in the current quarter, while Fifth & Pacific Cos Inc's FNP.N kate spade saw same-store sales rise 34 percent in the latest quarter.

Michael Kors "is very clearly aiming to build assets nearby Coach's full price and factory outlet stores to attack Coach's dominant market share," UBS analyst Michael Binetti wrote in a note.

Coach said overall revenue in its fiscal fourth quarter that ended June 30 rose 12 percent to $1.16 billion, below the $1.2 billion that Wall Street analysts were expecting, according to Thomson Reuters I/B/E/S.

Net income was $251.4 million, or 86 cents per share, compared with $202.5 million, or 68 cents, a year earlier. That was a penny above what analysts were expecting.

The company continued to benefit from its overseas business. Same-store sales in China, where it is expanding quickly, rose by a double-digit percentage. Sales in Japan, its second-largest market, rose 16 percent, excluding the impact of currency.

Coach shares fell 18.6 percent to close at $49.33 on the New York Stock Exchange on Tuesday.

(Reporting by Phil Wahba in New York; Editing by Maureen Bavdek, John Wallace, Jan Paschal and Matthew Lewis)

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