Coach Slumps as Second-Quarter Profit Trails Estimates

Jan. 23 (Bloomberg) -- Bloomberg's Sheila Dharmarajan reports that Coach missed profit estimates as demand lagged in North America and looks at the challenge the company faces from Michael Kors. She speaks on Bloomberg Television's "Bloomberg Surveillance."

Coach Inc. (COH) plunged the most in more than five months after the largest U.S. luxury handbag maker reported fiscal second-quarter profit that trailed analysts’ estimates, hurt by lower demand in North America.

Coach fell 16 percent to $50.75 at the close in New York, for the biggest decline since July 31. The shares dropped 9.1 percent last year compared with a 25 percent gain in the Standard & Poor’s 500 Retail Index.

Chief Executive Officer Lew Frankfort said the company had a “challenging” holiday season amid economic pressure on consumers and increased competition in the women’s handbag category. Sales at stores open at least a year in North America dropped 2 percent in the quarter. Coach also said sales at U.S. department stores were “modestly below” the previous year.

“The 2 percent decline in comparable sales is disappointing along with weakness in the wholesale division,” Corinna Freedman, an analyst with Wedbush Inc., said in a phone interview today. “We saw greater competitive threats, and at Coach’s price points under $300, their consumer is probably being squeezed by the economy.”

Net income rose 1.5 percent to $352.8 million, or $1.23 a share, in the three months ended Dec. 29, from $347.5 million, or $1.18, a year earlier, New York-based Coach said today in a statement. Analysts projected $1.28, the average of estimates compiled by Bloomberg.

Freedman, who is based in New York and rates the shares neutral, had estimated a 4 percent increase in North American comparable sales while David Schick, an analyst at Stifel Financial Corp, had projected a gain of 3 percent.

Total revenue in the quarter increased 3.8 percent to $1.5 billion, trailing the $1.6 billion average of analysts’ estimates compiled by Bloomberg.

Increased Competition

Coach has faced increased competition from Michael Kors Holdings Ltd. (KORS), Ralph Lauren Corp. (RL) and Fifth & Pacific Cos.’s Kate Spade brand, among others, as more apparel and accessories companies have sought to profit from the lucrative U.S. handbag market that Coach has dominated for more than a decade.

In the previous the quarter, Coach introduced its Legacy line, inspired by its archives of classic leather goods, which it called its most significant product debut since 2001.

“The Legacy line was probably not the comparable sales driver that Coach had planned or hoped,” Freedman said.

Coach maintained its prices to protect the brand as promotional activity increased, Frankfort said in the statement. Gross margin, the share of sales left after subtracting the cost of goods sold, was little changed at 72.2 percent. Analysts estimated 72.4 percent, on average.

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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