(Adds sales forecast, CEO comments, updates share activity)
By Phil Wahba
Jan 22 Coach Inc's sales in North America fell sharply during the key holiday quarter as the handbag maker continued to lose customers to fast-growing rivals.
The New York company, known for its Poppy handbags, on Wednesday reported a 13.6 percent decrease in comparable-store sales in North America.
It was the third straight quarter of decline in a market that accounts for 70 percent of its revenue, and a much deeper drop for the holiday quarter than Coach forecast in October.
Coach shares were down 6.2 percent to $49.29 in late morning trading.
There were some bright spots in Coach's results: sales in China rose 25 percent, quelling fears a slowdown in luxury spending growth there would hurt Coach. And sales in North America for handbags priced above $400 were also up.
Still, company executives expect Coach's problems to persist in North America in the next six months, predicting continued sales drops there.
Relief may only come in the fall, when the first collection designed under its new creative director, Stuart Vevers, hits stores.
Until then, Coach will have to make do with offerings many analysts said are stale and less appealing than merchandise offered by rivals such as Michael Kors Holdings Ltd, kate spade and Tory Burch, which are aggressively expanding their fleets of stores.
"These guys are definitely losing share. Fashionwise, they're missing the beat," Edward Jones analyst Brian Yarbrough said.
Between 2011 and 2012, Coach's share of the U.S. handbag market fell to 17.5 percent from 19 percent, according to Euromonitor International. Michael Kors' market share rose to 7 percent from 4.5 percent.
North American sales fell 9 percent to $983 million in the second quarter ended Dec. 28, a startling drop in a women's handbags and accessories market Coach executives said grew by a "high single-digit" percentage during the period.
Chief Executive Victor Luis is pinning Coach's turnaround hopes on Vevers' collections making Coach fashion-forward again. Luis told analysts on a call that Vevers was "providing a fashion relevance for the brand like we have never had."
Vevers joined Coach from Loewe - a luxury handbag brand owned by LVMH - in September, replacing longtime creative director Reed Krakoff.
Coach's overall revenue fell 5.6 percent to $1.42 billion, in the second quarter, while net income dropped to $297.4 million, or $1.06 per share, from $352.8 million, or $1.23 per share, a year earlier.
Analysts on average had expected earnings of $1.11 per share on revenue of $1.48 billion, according to Thomson Reuters I/B/E/S.
To win back shoppers, the 73-year-old company is trying to offer more footwear and fashion to become a lifestyle brand. Coach will be presenting a collection at New York Fashion Week next month for the first time.
Chief Executive Victor Luis, who took the reins this month from longtime CEO Lew Frankfort, told Reuters that Coach is "rebalancing" its merchandise selection and increasing its offerings of handbags priced $400 or more.
After the 2008-09 recession, Coach had ramped up its selection of lower-price handbags.
During the 2013 holiday season, Coach had to contend with a problem many retailers have complained about: a drop in traffic to shopping malls, and fewer shoppers coming into its stores. Still, kate spade and Michael Kors, which operate many stores in the same malls as Coach, are expected to report sales gains.
Coach's poor sales led to a surplus of merchandise it said it would clear through its factory outlets, raising the specter of more pressure on its profit margin. Inventory levels were up 12 percent at the end of quarter, while companywide sales fell 3 percent, stripping out the effect of currency fluctuations.
Its gross profit margin fell 3 percentage points to 69.2 percent of sales during the quarter, hurt by deep discounting.
The 2013 holiday season was the most discount-driven period since the recession, leading many large U.S. retailers to slash profit forecasts earlier this month. (Reporting by Aditi Shrivastava and Phil Wahba; Editing by Ted Kerr and Andrea Ricci)