UPDATE 2-Coach sales beat Street as North America regains momentum

Tue Apr 23, 2013 10:59am EDT

* Third-quarter earnings/share $0.84 vs est $0.80

* Third-quarter sales $1.19 bln vs est $1.18 bln

* Annual dividend hiked 13 pct to $1.35/shr

* Shares up 11 pct (Adds analyst comment, details, updates share price)

By Siddharth Cavale

April 23 (Reuters) - Leather goods retailer Coach Inc reported higher-than-expected quarterly sales after expanding into clothing and shoes to compete with emerging rivals, sending its shares up 11 percent in morning trading.

Coach, which relaunched itself this year as a "lifestyle brand" after demand for its premium handbags began to sag, beat Wall Street expectations by boosting sales in North America in the third quarter.

Same-store sales in its biggest region rose 1 percent in the quarter ended March compared to a year earlier, reversing a 2 percent decline in the preceding holiday quarter.

"The two biggest positives in the quarter were North America same-store sales and gross margins being better than anticipated," Edward Jones analyst David Yarbrough told Reuters.

Gross margins in the quarter rose 0.35 percentage points to 74.1 percent. Yarbrough attributed the margin rise to the higher sales in North America.

The New York-based company is facing competition at home from rivals such as Michael Kors Inc and Fifth & Pacific's kate spade, whose competitively priced clothing and accessories have gained popularity and eaten into Coach's market.

To compete, Coach unveiled a new strategy in January to expand into footwear and clothing, spooking investors with the notion that strong demand for its handbags -- some of which sell for as much as $1,200 -- may be easing.

"Our new footwear assortment, which launched during March in over 170 stores in North America and 60 directly operated stores internationally, has been very well received," Victor Luis, the company's chief commercial officer, said in a statement.

Coach's overall sales in North America, including online sales, rose 7 percent in the quarter. North America accounted for about two-thirds of the company's sales during the period.

"The footwear strategy is working and holding up very well, which is leading to increased traffic as well as number of transactions," Citi analyst Oliver Chen said.

International sales rose 6 percent to $382 million in the quarter, driven by a 40 percent rise in sales in China. The company did not give a dollar figure for its Chinese sales.

Overall, the company's revenue rose 7 percent to $1.19 billion in the third quarter, beating the average analyst forecast of $1.18 billion, according to Thomson Reuters I/B/E/S.

Net income rose to $239 million, or 84 cents per share, for the quarter ended March 30 from $225 million, or 77 cents per share, a year earlier.

Analysts on average had expected the company to report per-share earnings of 80 cents.

Coach also said it would raise its annual dividend by 13 percent to $1.35 per share.

The stock, trading at $56.12, was one of the highest percentage gainers on the New York Stock Exchange. (Additional reporting by Maria Ajit Thomas; Editing by Sreejiraj Eluvangal and Robin Paxton)