--Sales and profit increase less than expected in fiscal second
quarter
--Weak traffic and resistance to promotions pull down North
American same-store sales
--Shares fall 15%
(Updates with executive comments, further details
throughout)
By Joan E. Solsman
Luxury handbag maker Coach Inc. (COH) insulated its brand
prestige to the detriment of North American sales during the
holidays, reporting an unexpectedly weak 1.5% increase in
fiscal-second-quarter earnings.
Efforts to protect the Coach image have taken on a heightened
importance as it tries to become a more diverse lifestyle brand,
one in which customers can deck themselves out in Coach
head-to-toe. But the company lost share in its key U.S. handbag
market to upstart luxury brands with aggressive promotions, as it
feared watering down its cachet.
Shares recently dropped 15% to $51.62 as profit and sales growth
both fell short of expectations, as North American same-store sales
declined for the first time in three years.
Chairman and Chief Executive Lew Frankfort said the month of
December brought the quarter's two main challenges: weak traffic
and intensifying promotions.
Uncertainty about the fiscal cliff and Sandy recovery kept
shopper levels low, executives said, with the latter causing about
one percentage point of its 2% North American comparable sales
decline. Total North American sales increased 1% to $1.08
billion.
In addition, competition and promotions intensified in women's
bags and accessories, especially in the weeks leading up to
Christmas. Mr. Lew said Coach had ability to promote its way to
positive same-stores sales but resisted to protect its brand's
standing.
John Kernan, an analyst for Cowen & Co., noted competition
from the likes of Michael Kors Holdings Ltd. (KORS), Kate Spade and
Tory Burch was dogging the company. Coach "is having difficulty
defending its industry-leading market share to upstart lifestyle
brands and more promotionally driven brands in the U.S. department
stores," he said in a note to clients.
Indeed, Coach's intractable stance on promotions cost it market
share in U.S. handbags, a rare admission. "Category growth was 10%
more or less," said Mr. Lew. "This is the first time that we have
not held or grown faster than the category."
Protecting brand prestige is key to Coach as it advances on its
strategy to become more of a "lifestyle brand" with a broad
assortment of product rather than chiefly being a handbag
maker.
Chief Financial Officer Jane Nielsen said Coach is more cautious
about the second half, its optimism tempered by the second
quarter's results. "We're mindful of balancing the impact of the
muted consumer environment and the challenging market dynamics in
North America with our optimism around men's and the strong
international expansion opportunities," she said.
Coach expects second-half sales to increase in a
high-single-digit percentage with North American same-stores sales
roughly even with the prior year. That follows an earlier full-year
view for double-digit sales growth with low- to mid-single-digit
comparable sales. It reiterated its margin outlooks.
To get its same-store sale out of negative territory, executives
said Coach is focused on fresh spring assortment, especially on
leather inventory to offset weakness in logo and mixed
materials.
North American President Michael Tucci hints company dropped
ball on leather, which he says has significant opportunity but "we
have to be more aggressive" on pricing and innovation.
Longer term, Coach believes shoes will be traffic driver, making
footwear a vanguard of its shift to wider assortment. Coach is
relaunching shoes in March and installing shoe salons in some
flagship stores.
Coach's profit had grown for more than three years on the
strength of its North American direct-to-consumer businesses,
global expansion and the opening of men's stores in the U.S. and
Japan. Coach has said fiscal 2013 will be an investment year, in
which it will accelerate the acquisition of domestic-retail
operations in key Asian markets.
For the quarter ended Dec. 29, Coach reported a profit of $352.8
million, or $1.23 a share, up from $347.5 million, or $1.18 a
share, a year earlier. Sales rose 3.8% to $1.5 billion.
Analysts polled by Thomson Reuters had most recently forecast
earnings of $1.28 a share on revenue of $1.6 billion.
Gross margin was flat at 72.2%.
International sales rose 12% to $411 million. Sales in China,
which Coach has made the cornerstone of its international strategy,
climbed 40%. Sales were down 2% in Japan, on a constant-currency
basis.
--Melodie Warner contributed to this article.
Write to Joan E. Solsman at joan.solsman@dowjones.com
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