Coach posts big gains in China; U.S. sales pick up

Tue Oct 23, 2012 11:19am EDT

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(Reuters) - Upscale leather-goods maker Coach Inc (COH.N) on Tuesday reported strong quarterly sales growth at its North American stores and big gains in China, regaining momentum in two key markets and sending its shares up nearly 7 percent.

Sales at its stores in North America - still the company's biggest market by far - rose 11 percent. In China, a small but fast-growing market for Coach, sales at stores open at least a year also jumped by a double-digit percentage.

That follows two straight quarters in which the pace of Coach's North American sales growth slowed considerably.

Coach shares are down from a March high of $79.64. Concerns about the company were compounded when Western luxury brands such as Tiffany & Co (TIF.N) and Burberry Group PLC (BRBY.L) recently warned about slowing growth in China.

So-called "affordable luxury" brands need China to fuel expansion.

Chinese shoppers' appetite for affordable prices worked in Coach's favor, Chief Executive Lew Frankfort said in an interview. "Our price points are extremely compelling relative to the European luxury brands," he told Reuters.

Sales in China were "better than feared," Lazard Capital Markets analyst Jennifer Davis said in a note.

Coach's performance was not enough to buoy shares of U.S. rivals also courting Asian shoppers. Ralph Lauren Corp (RL.N) shares were down 2.5 percent, while Tiffany was off 2.1 percent.

Consulting firm Bain & Co last week forecast global luxury sales growth would slow sharply to 5 percent this year from 13 percent in 2011 as Chinese and European consumers cut spending.

GETTING SOME STEAM BACK

In North America, Coach's results in its fiscal first quarter, ended September 29, were an improvement over the two preceding quarters, when gains were anemic. This time, comparable sales rose 5.5 percent, above Coach's own forecast from three months ago, when it warned that shoppers wanted to see bargains at its factory stores before they would buy.

Coach, which operates 354 full-service stores and 174 factory outlets, experimented during the quarter with social media by offering a coupon through Facebook, prompting concerns among some Wall Street analysts that promotions of some kind were needed even at full-service stores.

Coach has also faced competition in its home market from fast-growing brands including Michael Kors (KORS.N) and Fifth & Pacific Cos Inc's FNP.N kate spade, prompting questions about how sustainable Coach's strength would be.

Companywide, revenue in the first quarter rose 10.6 percent to $1.16 billion, in line with analysts' average forecast, according to Thomson Reuters I/B/E/S.

Frankfort said in a statement that the launch of its Legacy handbag collection, a line that harkens back to classic styles from the 71-year-old company, had been successful.

Net income in the quarter rose to $221.4 million, or 77 cents per share, from $215 million, or 73 cents per share, a year earlier. Earnings per share were a penny above the average Wall Street estimate.

Profit was dented by the company's efforts to buy its local distributors in Malaysia and Korea.

(Reporting by Phil Wahba in New York; Editing by Maureen Bavdek and John Wallace)

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