UPDATE 4-Coach sees soft North American sales; more executives exit

Tue Jul 30, 2013 3:02pm EDT

* Coach loses customers to Michael Kors, other hot brands

* Two more executives depart amid big changes at the top

* Coach shares fall 8 pct

By Phil Wahba

July 30 (Reuters) - Coach Inc disclosed a new round of executive departures on Tuesday and reported disappointing handbag sales in North America, dashing investor hopes that the leather goods maker will rebound anytime soon.

Shares of New York-based Coach, known for its Poppy handbags, were down 8.2 percent at $53.06 in afternoon trading.

Sales at Coach's stores open at least a year fell 1.7 percent in the latest quarter in North America, where Coach gets 63 percent of sales. It continues to lose shoppers to hot brands such as Michael Kors, kate spade and Tory Burch.

The company told Wall Street on a conference call not to expect any improvement in the new fiscal year, begun June 30. It said in February that it planned to offer more footwear and clothing by the holiday season to reignite sales.

Those efforts come at a time of significant change at the top, a source of concern for investors. Coach is getting a new chief executive and a new creative director and is looking for a chief operating officer.

"We agree there's a lot going on," long-time Chief Executive Lew Frankfort said, acknowledging investor qualms. But he disputed the notion that the management changes were disruptive. "We have a seasoned group of Coach veterans taking on these roles," he said.

In January, Coach said the head of its international business, Victor Luis, would succeed Frankfort next year. Its longtime creative director, Reed Krakoff, credited with fueling Coach's explosive growth in recent years, is striking out on his own now that he has bought his namesake brand from Coach.

On Tuesday, Coach said Mike Tucci, the head of its North America business, and Jerry Stritzke, its operations chief, were leaving the company. Analysts had expected this, given that the two had been considered candidates to succeed Frankfort.

Still, it's a lot of change all at once.

"The combination of all of the departures could be a cause for concern because it comes at a time when they're trying to right the ship (particularly in North America) and potentially have issues on the creative side," John Del Vecchio, a portfolio manager with AdvisorShares Ranger Equity Bear ETF, an all-short, actively managed domestic exchange-traded-fund, said in an email.

LOSS OF MARKET SHARE

Coach said its overall revenue rose 5.8 percent to $1.22 billion in the fiscal fourth quarter, ended June 29, helped by gains in its men's merchandise and in China. That was below the $1.24 billion Wall Street was looking for.

The company's problems centered on weak sales in its bread-and-butter business - women's handbags in North America. The drop in comparable-store sales there was the second in three quarters.

"They have lost some market share, no question about it, especially among young, fashion-conscious shoppers," Edward Jones analyst Brian Yarbrough told Reuters.

Executives acknowledged as much, saying the North American handbags and accessories market was expected to rise by a low double-digit percentage in 2013.

Coach plans to close 16 weaker North American stores this year, but said it would expand a few as well.

Despite the weak North American results, there were some positive signs. Gross profit margin rose slightly, suggesting Coach has not had to discount much.

Francine Della Badia, who heads North American merchandising and is succeeding Tucci, said sales of handbags priced at $400 or more had improved. Earlier this year, Coach was struggling to sell those pricier products - a smaller but important part of its business.

Sales to department stores also ticked up and the company said it will continue to renovate some of its shops at key department stores.

Excluding the effect of currency fluctuations, international sales rose 17 percent, helped by a 35 percent jump in China.

Net income for the quarter fell to $221.3 million, or 78 cents per share, from $251.4 million, or 86 cents per share, a year earlier. Excluding some one-time items, Coach earned 89 cents per share, in line with Wall Street forecasts.

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