TPR Tapestry Inc

By Suzanne Kapner 

Coach Inc. reported strong demand for higher-priced handbags at its retail stores and said it would slash its business with department stores, as the fashion company works to wean customers off discounts.

Sales at the handbag maker's existing North American stores grew for the first time in more than three years in its latest quarter, evidence that the company's turnaround is starting to take hold.

Coach Chief Executive Victor Luis told analysts on Tuesday that the results "capped a year where we returned the Coach brand to growth while elevating brand perception." He predicted sales would continue to improve in the current fiscal year even as the company reduces sales to retail chains.

The company plans to pull out of 250 department stores in the current fiscal year, which would reduce its distribution in the channel by about 25%. It is also reducing the amount of money it provides department stores to cover the cost of discounts, which would exclude the brand from certain storewide promotions. The move will hurt the company's operating margin, with most of the effect felt in the first quarter.

"This is very much a surgical move that is meant to drive the long-term sustainable health of our brand," Mr. Luis said, adding that he wants to avoid confusing shoppers who see Coach items selling for higher prices at its retail stores than at department stores.

Coach has upgraded its handbags and accessories with better quality and more fashion, while curtailing discounts -- efforts that have helped it stem a long sales decline in the Coach brand in its home market, where sales at existing stores increased 2% in the three months to July 2.

The company still faces challenges, including sluggish growth in overall handbag sales, continued competition from Michael Kors Holdings Ltd. and other rivals and intense discounting across the retail landscape. Last week, Kate Spade & Co. shares tumbled after the company slashed its financial forecasts for the year. Kors reports results on Wednesday.

Investors who had bid Coach stock up 25% since the start of the year had been looking for even stronger growth. Coach shares slipped 50 cents to $40.95 in early afternoon trading.

North America outlet stores, which have been hurt by a pullback in tourist spending, pose another challenge. Sales at existing Coach outlet stores were flat in the period, and the company isn't expecting sales to increase materially for the balance of the year.

The company remodeled 300 stores in its recently completed fiscal year, bringing total remodels to 450 world-wide.

It is also rolling out its high-end 1941 line, with handbags that can sell for as much as $800, to all of its Coach stores as its seeks to appeal to more affluent shoppers. Handbags and accessories priced over $400 accounted for 40% of is sales in the quarter, up from 30% a year ago.

Quarterly sales rose 15% to $1.15 billion in the fourth quarter. Net income totaled $81.5 million, up from $11.7 million a year ago.

Coach said the Stuart Weitzman brand, which it acquired last year, had sales of $345 million for the year. Founder Stuart Weitzman will step down as creative director in May 2017, but will remain chairman. He will be succeeded by Giovanni Morelli, who has worked for Marc Jacobs, Chloe and Burberry.

Coach expects revenue for the current fiscal year to increase by roughly 2% to 5%. Operating margin should range from 18.5% to 19%, compared with 17.3% in the recently completed year.

--Lisa Beilfuss contributed to this article.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

August 09, 2016 12:49 ET (16:49 GMT)

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