UPDATE 4-Coach to lower prices, cut expansion; shares fall

* Q2 EPS 67 cents, meets Wall Street’s lowered estimate

* Halves North America store expansion plans

* Says to cut prices 10-15 pct in 2010

* Shares down 7.5 percent (Adds analyst comment, updates share price)

By Martinne Geller

NEW YORK, Jan 21 (Reuters) - U.S. handbag maker Coach Inc COH.N reported a lower quarterly profit on Wednesday and said it would cut prices on its handbags and scale back store expansion plans, sending its shares down 7.5 percent.

Coach bucked a retail trend during the recent holiday season by not discounting its full-priced merchandise, even as other store chains took severe markdowns to lure shoppers.

In its 2010 fiscal year, which begins in June, the company plans to introduce more handbags in the $200 to $300 range. That would reduce overall prices 10 percent to 15 percent.

Chief Executive Lew Frankfort said in an interview that the lower prices are meant to offer value to consumers “who are clearly more reluctant to spend.”

Frankfort said 2008 was the “most difficult holiday season our company has experienced during my 30-year tenure,” but noted that traffic to Coach’s full-priced North American stores has stabilized in the weeks since the Christmas holidays.

But investors may worry that the company’s pricing stance is not aggressive enough, Pali Capital analyst Stacey Widlitz said, as shoppers have grown to expect much sharper discounts.

“There is an overriding concern in general that in this environment, when competition has 50 to 75 percent off sales in every window and Coach is trying to manage its full-priced strategy, where does that leave its traffic opportunity?” she said.

In the fiscal second quarter, which ended on Dec. 27, sales were hurt by heavy discounts at department stores and Coach factory stores. Coach’s full-priced stores were also hurt as bargain-hunting shoppers looked elsewhere.

Second-quarter net income fell to $216.9 million, or 67 cents per share, from $252.3 million, or 69 cents per share, a year earlier.

The profit met analysts’ estimates, which were cut earlier this month after the maker of high-end bags, wallets and accessories warned that earnings for the critical holiday quarter would fall.

Quarterly sales fell nearly 2 percent to $960 million.


Quarterly sales at North American stores open at least a year fell 13.2 percent. Sales in Japan rose 15 percent due to a stronger yen. Excluding the currency impact, sales in Japan fell 1 percent.

Sales in China rose at a double-digit rate, and Coach said it plans to expand the distribution of its products there.

The New York-based company halved its fiscal 2010 North American expansion plans, saying it intends to open about 20 new locations instead of its former plan for 40. It said it will also suspend retail store expansions.

Coach did not provide an earnings outlook for the rest of the fiscal year but tried to assure investors that it is financially solid by pointing out that it has an essentially debt-free balance sheet and a significant cash position.

Despite lower overall spending, Coach said it is increasing its share of the U.S. handbag and accessory market.

Coach shares were down $1.19 to $14.68 in midday trade on the New York Stock Exchange. (Additional reporting by Aarthi Sivaraman; Editing by Matthew Lewis and John Wallace)