By Lisa Beilfuss
There are few signs yet that Coach Inc.'s turnaround is taking
hold.
Total North American sales fell 24% from a year ago, with sales
at existing Coach retail stores down 23%, and those of Coach
products at department stores off 30%. Those steep drops helped
fuel a 54% plunge in profit for the three months to March 28.
Although the results were in line with the company's forecasts,
they fell short for some investors, who had bought up the stock up
in recent months. The stock dropped 4.5% in midmorning trading.
Before Tuesday, the stock had gained 13% so far this year.
Chief Executive Victor Luis is trying to restore Coach's luster
after overexpansion and heavy discounting tarnished the handbag and
accessories maker just as rivals such as Michael Kors Holdings Inc.
and Kate Spade Co. were gaining ground. As a result, Coach is
pulling back on promotions, improving its designs and material
quality, and is upgrading some stores while closing those that are
unproductive.
Mr. Luis said he was pleased with the company's progress, but
cautioned that he doesn't expect its sales performance to improve
materially for the balance of this fiscal year, which ends in June.
He forecast that sales should start seeing a lift in the next 12
months and return to growth the following year.
Not everyone was convinced that the company's sales trajectory
is heading for an upswing. "Getting worse instead of better" was
the title of a note that Paul Lejuez, an analyst with Wells Fargo
Securities, sent to clients. "Results were weak and below buy-side
expectations," Mr. Lejuez noted.
The pace of total sales declines in North America has
accelerated to 24% in the current quarter from 20% in the three
months to the end of January.
Some of that was partly caused by the closure of 56 full-priced
stores and 13 outlet stores so far this year, as well as the impact
of sharply scaling back promotions. Coach held just two flash sales
a month this quarter, compared to three a week in the same period a
year ago.
Fewer discounts helped boost Coach's gross margin to 71.6% from
71.1% a year ago. But net income fell to $88 million from $191
million the prior year, partly due to higher expenses. Total sales
fell 15% to $929 million.
Coach is banking that store upgrades could help its turnaround.
It has converted 40 stores to a new, more luxurious format that Mr.
Luis said is resonating with customers. Mr. Luis said shopper
traffic improved over the past three months from the previous
quarter, though it remains a drag.
The stronger U.S. dollar has presented an additional challenge
for Coach's international business. Sales in the segment fell 3% to
$428 million. Excluding the impact of the currency moves,
international sales would have risen 4%.
Mr. Luis said Coach had no plans to alter its pricing and it
hasn't taken a big hit in North America due to reduced tourism as a
result of the strong dollar.
In January, Coach made a rare acquisition, buying upscale shoe
brand Stuart Weitzman for about $574 million, in the hopes of using
Mr. Weitzman's expertise to improve the design and production of
its own shoes. The deal is expected to be completed in the coming
weeks, Mr. Luis said Tuesday.
Write to Suzanne Kapner at suzanne.kapner@wsj.com
Access Investor Kit for Coach, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US1897541041
Subscribe to WSJ: http://online.wsj.com?mod=djnwires