April 20, 2010 / 11:13 AM / 7 years ago

UPDATE 4-Coach profit beats, eyes Europe expansion

5 Min Read

* Q3 EPS 50 cents vs Street view of 46 cents

* Doubles dividend, OKs $1 bln share buyback program

* Accelerates China targets, announces Europe expansion

* Shares up 0.9 pct (Adds CEO comment, details, background; updates stock)

By Ben Klayman

CHICAGO, April 20 (Reuters) - U.S. leather goods maker Coach Inc (COH.N) posted better-than-expected quarterly earnings as demand picked up in North America and said it would expand into Western Europe.

The company, which makes handbags, wallets, shoes and other accessories, also doubled its cash dividend, authorized a $1 billion share buyback program, and accelerated its China sales target by a year.

Its shares, which have risen more than 130 percent over the past year, were up 36 cents at $42.22 in afternoon trading.

Coach Chief Executive Lew Frankfort said demand in the company's full-priced business was improving, part of a consumer spending revival as the economy picks up.

"We were able to demonstrate across all geographies a strengthening of our business, which bodes well for the future," he told Reuters in an interview. "Consumers are less negative about the future than they have been."

Net income rose 37 percent to $157.6 million, or 50 cents a share, in Coach's fiscal third quarter that ended March 27, compared with $114.9 million, or 36 cents a share, a year ago.

Analysts on average were expecting 46 cents per share, according to Thomson Reuters I/B/E/S.

Sales rose 12 percent to $830.7 million, above the $811.5 million analysts had expected. North American same-store sales rose 5.1 percent, up from a 3.2 percent gain in the previous quarter when it rose for the first time in over a year.

U.S. consumer traffic was up from the previous quarter, while those buying items once in the store rose significantly from last year, Frankfort said, adding he expects spending for Mother's Day to be higher than last year.

Frankfort said Coach, which on Monday introduced a new line of totes and shoulder bags named "Julia," still believes it can realize double-digit sales and earnings growth.

"Two years from now, we will look back upon this quarter, the initiative that we announced in Europe, the acceleration of our business in China and the rejuvenation of our full-priced businesses and conclude that it indeed was an inflection point," he said on a conference call.

Coach estimates the U.S. handbag and accessories category rose at least 5 percent in the January-to-March quarter, while Coach's sales across all North American channels in the recent quarter increased about 15 percent.

Quicker China Growth, European Expansion

Coach also accelerated its China growth plans by a year, saying it was now targeting $250 million in sales during fiscal 2012. The company will open its first large, flagship mainland China store in Shanghai this week. That adds to the 37 stores already open in China, including 25 on the mainland.

Same-store sales in China, where the company is now profitable, in the third quarter were up double digits.

The company also announced plans to expand into Western Europe for a second time, after having failed selling its products there in the mid-1990s.

"Given further globalization, we feel that there's even stronger growth opportunity ahead than even we had been modeling thus far," said Sterne, Agee & Leach analyst Jennifer Milan, who has a "buy" rating on the stock.

Coach said it plans to open at least 14 locations in Printemps department stores throughout France over the next three years, with its first shop in Paris in June. Frankfort said the French initiative will not dilute earnings.

Coach also said it has reached an agreement in principle for a joint venture with British retailer Hackett Limited to open Coach stores in Britain, Spain, Portugal and Ireland. It expects the first locations in Britain and Spain will open during the next 12 months.

The company's board voted to double its cash dividend, raising it to 60 cents per share on an annual basis starting with the payment in July. It also authorized the repurchase of up to $1 billion of outstanding common stock by June 30, 2012. (Reporting by Ben Klayman, editing by Maureen Bavdek)

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