October 20, 2009 / 11:13 AM / 8 years ago

UPDATE 4-Coach profit beats, shares slip on cost concerns

* Q1 EPS $0.44 vs Wall Street view of $0.39

* Sees gradual EPS improvement vs yr ago for rest of FY

* Plans to open first mainland China store in Spring 2010

* Shares fall 2.8 pct on cost concerns (Adds CEO, analysts' comments, details, updates stock action)

By Ben Klayman

CHICAGO, Oct 20 (Reuters) - U.S. leather goods company Coach Inc (COH.N) reported a higher-than-expected quarterly profit on Tuesday, helped by demand for its lower-priced Poppy line, but concerns over rising costs in the future pushed its shares lower.

The maker of handbags, wallets, shoes, jewelry and other accessories expects earnings per share to show gradual improvement for the balance of the fiscal year when compared with the prior year, Chief Executive Lew Frankfort said in a telephone interview.

"Consumers are starting to feel a bit more confident that the economy is stabilizing, that the outlook is no longer dire," he said, adding that he expected a stronger holiday shopping season for the overall industry.

Frankfort said on a conference call with analysts that the strengthening trends continued in October for Coach.

However, shares in Coach were off 2.8 percent on concerns that inflation and investments in expansion would cut into results down the line.

"Expectations for Coach have risen pretty noticeably, so anything that detracts from that basis is going to be viewed as a negative," said Wall Street Strategies analyst Brian Sozzi.

The stock had more than tripled from early March to a year high of $35.46 on Oct. 15 on hopes of a rebound for its business. On Tuesday, it slipped 88 cents to $33.63.

"They're very well positioned to have a strong holiday," Needham & Co analyst Christine Chen said. "They should be able to return back to positive same-store sales ... because the product seems to be gaining traction with consumers."

PROFIT, SALES BEAT

Coach's net income was $140.8 million, or 44 cents a share, in the first quarter ended on Sept. 26, compared with $145.8 million, or 44 cents a share, a year earlier.

Analysts on average were expecting 39 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 1.2 percent to $761.4 million, above the $753.8 million analysts had expected.

Sales at stores open at least a year, or same-store sales, fell 1 percent in North America, an improvement from the previous quarter when same-store sales fell 6.1 percent. In China, same-store sales rose at a double-digit rate.

Sozzi said the same-store sales decline in North America was not as weak as expected.

Coach said its new Poppy line, which is aimed at younger women with its bright colors and lower prices, helped increase store traffic from the previous quarter.

The company also gained market share and saw increased sales in its stores of handbags, which carry higher profit margins, Frankfort said.

The average price of a Poppy bag is $260, about 20 percent less than the usual Coach purse. The line's introduction is part of a plan by Coach to reduce overall prices by 10 to 15 percent and appeal to more cost-conscious shoppers.

Coach is also seeing rapid growth in China, and plans to open its first mainland China flagship store in Spring 2010 in Shanghai. It expects to open an Asian distribution center in Shanghai before the end of the fiscal year to better manage growth in the region.

Sozzi said China now accounts for 2 percent of the company's annual revenue.

The company also plans to open its first stand-alone men's store this spring in New York City, as well as a few in Japan. (Reporting by Ben Klayman; Editing by Lisa Von Ahn, Derek Caney, Dave Zimmerman)

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