Coach’s Man Bags Help Profit Top Analysts’ Estimates

Aug. 5 (Bloomberg) -- Julie Hyman reports on luxury sales and earnings on “Market Makers.” (Source: Bloomberg)

Coach Inc. posted fourth-quarter profit that topped analysts’ estimates as men’s goods and rising demand in China helped counter slumping sales of women’s bags and accessories in North America.

Earnings excluding restructuring costs were 59 cents a share in the period ended June 28, New York-based Coach said today in a statement, topping the 53-cent average of predictions compiled by Bloomberg. Sales fell 7 percent to $1.14 billion, exceeding estimates for the first time in five quarters.

Under pressure in its main business, the largest U.S. luxury handbag maker has been adding men’s leather knapsacks, sunglasses and clothing. Coach is also producing more sophisticated bags and refurbishing stores after losing market share to Michael Kors, Kate Spade and Tory Burch. North American sales at Coach’s stores opened at least a year dropped 17 percent last quarter.

“It’s definitely pretty ugly but expectations were for them to be even uglier,” Brian Yarbrough, an analyst with Edward Jones & Co. in St. Louis who recommends buying Coach shares, said in a phone interview. “The women’s North American handbag segment continues to be extremely weak for them. But least it’s not a steeper decline.”

The shares rose 4.8 percent to $35.94 at 9:51 a.m. in New York. Coach had slumped 39 percent this year through yesterday, while Michael Kors Holdings Ltd. dropped 5.2 percent and Kate Spade & Co. rose 17 percent.

Store Closures

Investors were relieved that Coach declared a stable quarterly dividend of 33.75 cents today, payable Sept. 29, Yarbrough said. Some had feared Coach’s challenges would lead the company to cut the payout, he said.

Chief Executive Officer Victor Luis said in June that Coach would close a fifth of its North American locations, or 70 stores. Most of the planned closures will happen in the fiscal first half, with restructuring costs incurred in the fiscal year 2015, Coach said on a conference call today.

The retailer also plans to open new stores or remodel the main locations in its 12 biggest markets and reduce participation in online flash sales. The company also has cut 150 jobs.

Sales of men’s goods, at about $700 million in the year ended in June, will reach $1 billion in fiscal 2017, Luis said on today’s call.

China Sales

Last quarter, revenue in China jumped 20 percent.

Gross margin, or earnings left after subtracting the cost of goods, shrank to 69.4 percent from 73 percent a year earlier after Coach in June began semi-annual sales at its full-priced stores for the first time. The margin still came out better than the 68.8 percent predicted by analysts, Yarbrough said.

Coach is burnishing its “modern luxury” brand -- previously called “accessible luxury” -- by adding more fashionable bags that were presented during New York fashion week, and layering in higher-priced goods. The effort is being led Stuart Vevers, who was hired in mid-2013 as executive creative director after working at some of the top European luxury brands, including Louis Vuitton.

Earlier in 2013, Coach also announced its intention to expand its footwear, outerwear and other categories to become what it called a lifestyle brand anchored in accessories.

“It is going to remain difficult for the remainder of the year until the customer becomes aware of the new product,” said Yarbrough, the Edward Jones analyst.

Fourth-quarter net income dropped 66 percent to $75.3 million, or 27 cents a share, from $221.3 million, or 78 cents, a year earlier. Analysts, on average, predicted a 21 percent drop in sales at North American Coach stores open at least a year. They had anticipated $1.1 billion in total sales for the quarter.

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

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Cecile Daur, John Lear

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