Coach Sees Stability In 3Q Results And Introduces Dividend
22 April 2009 - 3:38AM
Dow Jones News
Handbag marketer Coach Inc. (COH) offered some encouraging
indications about consumer spending on Tuesday, saying demand for
its leather goods and accessories is no longer dropping and
reporting fiscal third-quarter earnings and sales that topped
analysts' expectations.
"We feel we've turned the corner," Coach Chief Executive Lew
Frankfort said in an interview with Dow Jones Newswires. "We're
very confident about the future."
That confidence prompted Coach to institute a 30 cents a share
annual dividend, only the second member of the Standard &
Poor's 500 Index, aside from Oracle Corp. (ORCL), to do so this
year. Forty-four of the companies have decreased their payout and
six have suspended it since 2009 began.
While it may be too early to declare conditions are getting
better for retailers overall, Frankfort's comments come a couple of
weeks before other retailers begin issuing their own quarterly
results, and they're serving as a welcome precursor. Investors are
responding to the earnings news and the new dividend by lifting
Coach stock 14% to $20.75, its highest level since the beginning of
the year.
Coach's third-quarter sales "were essentially even" with the
same period last year, and comparable store sales for the quarter
returned to pre-Christmas levels in North America, Frankfort
said.
The stable trend is continuing in April, after adjusting for
Easter's shift to this month from March, Frankfort said.
Coach "is seeing improved traffic and that is key," said Robert
Drbul, retail analyst at Barclays Capital. "But one must still
remain pretty cautions because of the volatility in the
economy."
To build momentum, Coach plans to increase to 50% the amount of
bags it sells between $200 and $300. The move expands an effort the
company slowly began in 2008, and that currently stands at about
30% of handbags.
At the same time, Coach will cut back a bit on the amount of
higher-priced bags and accessories it sells, although flagship
stores will still carry a large amount of higher priced items.
Coach is acting after net income for the fiscal third quarter
that ended March 28 dropped to $114.9 million, or 36 cents a share,
from $162.4 million, or 46 cents, a year earlier.
Excluding costs for job cuts, closing stores and other
restructuring measures, Coach would have earned 38 cents a share.
The figure compares to 37 cents by analysts that FactSet
polled.
Sales for the quarter declined by less than 1%, to $739.9
million from $744.5 million. Wall Street had projected $711.5 in
revenue.
Gross margin narrowed to a still-healthy 71% from 75% a year
earlier, but was affected by greater promotions at its outlets and
the introduction of lower-costing merchandise in Coach's
full-priced stores.
Inventories rose 23% to $358 million, in part to support new
stores in the U.S. and overseas, and down from 39% at the end of
the second quarter. The company's goal is to have inventory up by
just 10% at the end of this fiscal year.
To reduce some expenses, Coach is closing a few stores in tony
areas including Greenwich, Conn., and Palm Beach, Fla., saying
rents are high there and customer traffic is on the lower side.
The goal is to find the "sweet spot, with Coach products still
carrying cache, but not priced beyond the reach of customers
effected by the poor economy. "We want to be accessible to the
consumer [who] has been impacted by the recession and also be
appealing to those who have money and might be reluctant to spend,"
Frankfort said.
Coach sees immense opportunity in Asia, especially China, where
it already operates 27 stores. Another 10 are planned for next year
as part of plans for 50 within the next five years. Coach's stores
in China are experiencing double-digit comparable-store sales
growth, Frankfort said. "China is emerging and there is an open
playing field for Coach to develop its business where there are no
other indigenous brands."
While its own North American stores and outlets continue to
grow, the company is doing less through one of its traditional
avenues, department stores, where sales fell 30% over the quarter
as locations closed and Coach opted out of participating in the
deep discounting many of the stores conducted.
Coach will open 20 full-priced stores in North America in the
coming year, about half the amount it has over the prior two
year.
-By Karen Talley; Dow Jones Newswires;
karen.talley@dowjones.com; 201-938-5106