* Fiscal second-quarter profit $1.23/share vs Street view
* North America comparable sales down 2 percent
* Sees flat North American comps in 2nd half
* Plans rebranding; relaunching shoes in 2013
* Shares down 15.8 percent in afternoon trading
(Updates with details, share activity)
By Phil Wahba
Jan 23 Coach Inc on Wednesday reported
weak holiday-quarter results and unveiled a new strategy for
shoes and clothing, spooking investors with the notion that the
days of strong demand for its premium leather handbags may be
The company's prescription for re-igniting drooping sales in
North America, its biggest market by far, calls for it to become
a "head-to-toe" lifestyle brand by moving further into segments
where it is a minor player, including shoes and clothing.
Shares of Coach, which also missed earnings estimates by a
nickel, fell nearly 16 percent to $51.12 in afternoon trading,
slashing the company's market value by nearly $2.7 billion.
Wall Street, long accustomed to seeing Coach post large
sales gains - company revenue rose 14.5 percent last fiscal year
- was unimpressed, seeing the redefinition of a 72-year-old
brand a venture fraught with risk.
"It means management thinks the core (business) can't grow,"
Morningstar analyst Paul Swinand told Reuters, saying the new
strategy could hurt the brand since footwear is not its forte.
Comparable sales in North America fell 2 percent during the
holiday quarter, only the third decrease in 11 years. The
company also forecast flat comparable sales there in the second
half of its fiscal year.
Last fiscal year, they rose 6.6 percent.
In a bid to diversify away from handbags, Coach said it will
"re-launch" its shoe section at 170 of its 356 stores in March,
and has begun to install shoe "salons" to better showcase its
footwear at a few flagship stores.
That will be followed by an increased offering of clothing,
watches and jewelry, categories Coach already sells, and fancier
presentation as part of a rebranding that will be more visible
by the 2013 holiday season.
The idea is to broaden selections and present them more
invitingly to face off against smaller but increasingly popular
rivals like Michael Kors Holdings Ltd, privately-held
Tory Burch, and Fifth & Pacific Cos Inc's kate spade,
whose same-store sales rose 27 percent last quarter.
Those three brands all sell handbags, clothing and shoes.
Despite its reputation as a purveyor of affordable luxury,
Coach has struggled to make headway into higher-end items and
the company expects a bigger selection of shoes will help
"There is a very substantial opportunity in this space over
$400 where we are barely participating," Chief Executive Lew
Frankfort told analysts on a conference call.
"We see footwear as a real traffic driver," Frankfort said.
While good news in theory, that will take valuable time and
money to pull off, analysts said.
"We think this strategic shift is a positive move and
potentially a high-reward strategy that will take significant
time and investment to accomplish," said Omar Saad, Senior
Managing Director of ISI Group.
Business at its own full-service stores and factory outlets,
which sell less expensive merchandise, was hit by fewer shoppers
visiting malls and outlet centers in North America during the
holiday season, when U.S. consumers across the income spectrum
proved to be cautious about spending.
One Coach executive on a call with Wall Street analysts said
he was surprised at how much discounting took place at
department stores, particularly in December. Macy's Inc,
Nordstrom Inc and Dillard's Inc are among stores
that sell Coach products.
But Coach resisted pressure to offer more deals, preferring
to protect both its margins and its brand image.
"Our modest growth was highly profitable," Frankfort told
Overall revenue in Coach's fiscal second quarter, ended Dec.
29, rose 3.8 percent to $1.5 billion, missing analysts' average
forecast for net sales of $1.6 billion, according to Thomson
Reuters I/B/E/S. Revenue in Japan, Coach's No. 2 market, fell 2
percent, excluding the impact of a strong yen.
The holiday shopping season was weak for U.S. retailers,
with sales rising 3.1 percent in November and December,
according to the National Retail Federation, below forecasts.
Even high end chains were not spared: high-end jeweler Tiffany &
Co reported a drop in sales at its Fifth Avenue flagship
store in New York.
Despite weak North American sales, there were bright spots
for Coach. In China, still a small market but the cornerstone of
Coach's international expansion, sales were up 40 percent in the
Coach said its push to build up its men's business, which
includes wallets and briefcases, is paying off, with the company
set to have sales in that segment rise 50 percent for the full
Net income in the second quarter was $352.8 million, or
$1.23 per share, compared with $347.5 million, or $1.18 a share,
a year earlier. Per-share earnings were 5 cents below the
average Wall Street estimate.
(Reporting by Phil Wahba in New York; Editing by Maureen
Bavdek, Nick Zieminski and John Wallace)