Jan. 23 (Bloomberg) -- Coach Inc., the largest U.S. maker of luxury goods, said second-quarter profit rose 31 percent on demand for a new line of handbags that sell for $450 on average.

Coach raised its earnings and sales forecast for the full year. January sales are ``very strong,'' Chief Executive Officer Lew Frankfort said in a statement today.

Profit has surged at least 30 percent in every quarter the past five years as Coach expanded into jewelry and shoes. The company will begin selling perfume in March.

``The growth is exceptional,'' said David Heupel, who helps manage more than $60 billion at Thrivent Financial for Lutherans in Minneapolis, including Coach shares. ``We just don't see that changing any time soon. They continue to leverage that brand.''

Net income climbed to $227.5 million, or 61 cents a share, from $174.2 million, or 45 cents, the New York-based company said today in the statement. Sales rose 29 percent to $836.4 million during the three months ended Dec. 30.

The results exceeded the 58-cents-a-share estimate of 14 analysts surveyed by Bloomberg. Coach said 2007 profit will be $1.71 a share, an increase from previous guidance of at least $1.63. Sales will rise about 25 percent to $2.63 billion, compared with an October estimate of $2.55 billion.

Gross margin, or the percentage of sales left after subtracting the cost of goods sold, narrowed for the first time in at least a year. It declined to 77.1 percent from 77.6 percent a year earlier as discounted sales at factory outlets rose at a faster pace than retail-store sales.

Margin Forecast

``The change is insignificant,'' Frankfort said in an interview. ``We have the highest gross margin in the industry,'' and it will stay at 77 percent to 78 percent, he said.

Coach shares fell 7 cents to $43.91 at 4:02 p.m. in New York Stock Exchange composite trading. They closed at a record $46.34 on Jan. 16, and have advanced 37 percent over the past 12 months.

``They are up against pretty tough comparisons'' in gross margins, Heupel said.

Coach said today that it will introduce its first fragrance at U.S. stores this quarter. In April, it will begin sales of a new line of handbags and accessories called Ergo, which may contribute 15 percent of North American retail-store sales, Frankfort said. The average Ergo handbag will cost $300.

The company also expanded plans for new stores in North America, saying it will open 40 locations this year, compared with an earlier target of 30. Twelve of them will be in mid-size cities such as Buffalo, New York; Portland, Maine, and Columbia, South Carolina.

New customers now account for about 20 percent of Coach's buyers, up from 15 percent a year earlier, he said. ``Accessories are playing a leading role in updating the consumers' wardrobe.''

Legacy

In the second-quarter, Coach was helped by its Legacy line of purses, which Frankfort introduced in September at prices about 45 percent higher than the company's average. The collection also includes sweaters, shoes, gloves and jeans. Legacy represented 18 percent of the company's North American retail store sales during the quarter, Frankfort said.

Sales also were boosted by wallets, enamel bracelets and other gift items sold over the holiday season for less than $100.

``We have strong selling at all ends'' of prices, Frankfort said.

Same-Store Sales

Sales at Coach's U.S. retail stores open more than a year rose 21 percent in the second quarter, while sales at discount outlets jumped 33 percent.

In Japan, comparable sales rose in the ``mid-single digit'' on a percentage basis, Coach said, without being more specific.

Frankfort said the company is expecting ``more modest growth'' in Japan, which represents about 18 percent of its sales, as the market matures. Comparable location sales in Japan, Coach's second largest market after the U.S., are forecast to rise in the ``low-single-digit'' in the second half, he said.

Indirect revenue, which includes sales to U.S. department stores and international locations that aren't owned by Coach, climbed 10 percent.

Frankfort is targeting handbag sales as he said the company had underestimated the market's potential. The U.S. market may be as big as $7.5 billion, he said, adding that Coach's share may grow to 35 percent from 17 percent now.

Coach had 237 retail stores and 90 outlets in North America as of Dec. 30. In Japan, it had a total of about 130 sales locations, including 126 owned by Coach.

To contact the reporter on this story: Andria Cheng in New York at lcheng@bloomberg.net

Last Updated: January 23, 2007 16:15 EST