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Coach Profit Tops Estimates as Cost Gains Are Contained

Coach Inc. (COH), the largest U.S. luxury handbag maker, reported fiscal first-quarter profit that exceeded analysts’ estimates as it kept expenses for acquisitions and e-commerce from increasing too quickly.

Net income rose 3 percent to $221.4 million, or 77 cents a share, in the three months ended Sept. 29, from $215 million, or 73 cents a share, a year earlier, New York-based Coach said today in a statement. Analysts projected 75 cents, the average of 28 estimates compiled by Bloomberg.

Chief Executive Officer Lew Frankfort has said that Coach is in “an investment year” and that results would be reduced by accelerated acquisitions and increased spending on e- commerce. Coach sacrificed some profitability to maintain sales momentum in North America, said Liz Dunn, an analyst with Macquarie Group in New York.

“They gave up some upside on the margin to fuel sales,” Dunn, who recommends buying the shares, said in a phone interview today. “They managed expenses better than we thought they would. I think they did the balancing act well.”

Gross margin, the share of sales left after subtracting the cost of goods sold, was unchanged at 72.8 percent, Coach said. Analysts estimated 73 percent, on average.

Coach climbed 7.1 percent to $58.02 at 9:38 a.m. in New York and earlier increased as much as 8 percent for the biggest intraday gain since Aug. 23, 2011. The shares had fallen 11 percent this year through yesterday.

Sales Climb

Total revenue in the quarter increased 11 percent to $1.16 billion, matching the average of analysts’ estimates compiled by Bloomberg.

Selling, general and administrative expenses grew to 44.2 percent of sales from 42.1 percent. David Schick, an analyst with Stifel Financial Corp. (SF) in Baltimore, estimated 44.7 percent.

Coach used promotions in its own full-priced stores and factory outlets as well as at department stores to drive sales, according to analysts including Corinna Freedman at Wedbush Securities and Christian Buss at Credit Suisse Group AG.

The company during the quarter introduced its Legacy line, inspired by its archives of classic leathergoods, which it called its most significant product debut since 2001.

Coach also said today that its board had authorized the buyback of as much as $1.5 billion in stock by June 30, 2015.

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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