TPR Tapestry Inc

By Steven Russolillo 

Coach Inc.'s turnaround appears to be gaining steam. Its stock price isn't fully reflecting that yet.

After years of overexpansion and heavy discounting that hurt the Coach brand, the handbag and accessories maker has tried to refashion itself again as an upscale luxury retailer. It has been reducing how much it sells to department stores, closing underperforming stores and trying to get its customers to pay full price. The efforts are starting to show promise.

Sales at Coach's existing North American stores increased over the summer for the first time in more than three years. And, in Tuesday's fiscal first-quarter results, they are expected to have risen 2.2% from a year earlier, according to analysts polled by FactSet. That would be the best growth rate since 2012. Earnings for the period ended in September are expected to be 45 cents a share, up 10% from a year ago.

Coach is investing in sprucing up its own stores and digital operations at a time when it is also selling less through struggling department-store operators. Coach plans to pull its merchandise from 250 department stores in this fiscal year, reducing its distribution in the channel by roughly one-fourth. Analysts at Stifel Nicolaus estimate that might reduce sales growth by a percentage point.

Meanwhile, it has upgraded the quality and look of its handbags and accessories. Customers have been willing to pay up for them, too. Those items priced at more than $400 accounted for 40% of Coach's sales in its fourth quarter, up from 30% a year ago.

And more strategic moves could be forthcoming after last year's $574 million deal for shoe brand Stuart Weitzman.

Still, Coach shares have lost about 17% over the past three months. Some of that is giveback from a strong rally in the first half of the year. But the stock has nearly halved in the past five years. Fetching 16 times projected earnings over the next 12 months, Coach remains cheaper than many rivals, including Ralph Lauren Corp., Kate Spade & Co. and Prada SpA.

Investors might catch one of the few discounts left at Coach.

Write to Steven Russolillo at steven.russolillo@wsj.com

(END) Dow Jones Newswires

November 01, 2016 02:47 ET (06:47 GMT)

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