October 26, 2010 / 11:31 AM / 9 years ago

Coach profit beats on handbags, overseas sales

NEW YORK (Reuters) - Coach Inc COH.N reported a higher-than-expected quarterly profit and its shares hit a three-year high as the upscale leather goods maker had strong sales both at home and abroad and said it expects robust holiday results.

Sales rose 19.7 percent to $911.7 million, boosted by an increase in business at U.S. department stores, particularly for handbags, and sales in Western Europe and China, where Coach is relatively new to the market.

Even in the mature North American market, stores open at least a year rose by a better-than-expected 8.5 percent during the first quarter, as customer traffic picked up, reversing the slowdown last quarter that alarmed investors.

“People were valuing Coach based a lot on their U.S. sales — the luxury market has already turned up this year, and it just wasn’t reflected in the stock price,” said Morningstar analyst Paul Swinand, noting that Coach shares had been weighed down by more modest U.S. growth in earlier quarters.

Coach shares were up $5.46, or 12.2 percent, at $49.89 in afternoon trading, a level they last reached in September 2007.

Despite the surge in the stock, analysts still think there is value in Coach shares. Wall Street Strategies analyst Brian Sozzi said the stock still had at least 15 percent upside potential in the next 12 to 18 months.

Buoyed by its quarterly results, the company slightly raised its outlook for North American same-store sales for the holidays and the rest of its fiscal year and said on a call with Wall Street analysts it now expects an increase in the mid-single percentage range from low-to-mid single digits.

Coach reported net income of $188.9 million, or 63 cents per share, for the fiscal first quarter ended October 2, up 34 percent from $140.8 million, or 44 cents per share, a year earlier.

Analysts on average had forecast 55 cents per share on sales of $846.8 million, according to Thomson Reuters I/B/E/S.

Gross margins rose 1.9 percentage points to 74.2 percent in the first quarter, mostly from favorable costs for leather a year ago, when Coach bought the material.

But the company said margins could be pressured in the coming quarters given higher leather prices in recent months.


Coach has positioned itself in the “affordable luxury” segment in the past two years as shoppers have cut back on discretionary spending, lowering average prices on its handbags by about 10 percent and expanding its outlet stores.

For example, many handbags in its “Poppy” collection retail for $298 and less, reflecting what Chief Executive Lew Frankfort told Reuters was the “new normal” in high end consumption. That compares with other handbags that can run to about $900 and the thousands that Louis Vuitton bags can cost.

Sales of handbags and accessories at Coach’s North American stores rose 20 percent and the company is planning to introduce other moderately priced handbag lines in the coming months.

“The luxury consumer is cautious, but willing to spend for those products she feels will enhance her sense of well being,” Frankfort told Reuters.

Also reflecting a longer-term shift to frugality among high-end shoppers, Neiman Marcus Group Inc NMRCUS.UL announced on Tuesday a new outlet chain called Last Call Studio and Saks Inc SKS.N has closed a number of full-line department stores this year, even as it expands its Off 5th outlet chain.

The company continued its push into China, opening eight new stores there, bringing the total to 49, and said same-store sales there had risen at a double-digit percentage clip.

In Europe, Coach plans to open a flagship store on London’s Bond Street, as well as new stores in France, Spain and Portugal in the coming months as it seeks to benefit from a cutback on luxury spending there and take some market share from high end companies such as Hermes (HRMS.PA) and LVMH


LVMH took a 17.1 percent stake in Hermes this week and Tod’s (TOD.MI) CEO Diego Della Valle increased his stake in Saks to 19 percent last week, raising the specter of more deal-making in the luxury industry.

Although Coach is growing quickly and will benefit from shoppers’ new, more modest purchasing power, its market value of $14.4 billion would make it a “hard pill to swallow” for any potential suitor and require taking on a lot of debt, Swinand said. Still, Coach’s ability to generate cash could make it attractive, he added.

Reporting by Phil Wahba; editing by Derek Caney, John Wallace, Dave Zimmerman and Andre Grenon

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